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5 201 the plc meets Telecommunications plc, British Group subsidiaryAs a wholly-owned of BT reports 10-K as applied to of Form Instruction and (b) (I)(1)(a) forth in General set conditions format. disclosure reduced Form 20-F with the filing this 20-F and is therefore on Form Annual &Report 20-F Form

BRITISH TELECOMMUNICATIONS plc 2015 office: 81 Newgate Street, London EC1A London 7AJ Street, 81 Newgate office: 73830 www.bt.com PHME Registered 1800000 in England No. Registered Group BT by Produced RR Donnelley by Typeset Ltd Printers Leycol in England by Printed paper chlorine-free on elemental Printed sustainably managed forests from Sourced British Telecommunications plc British Telecommunications 00B_802639_CoverSpread_9mm.indd All Pages BT’s purpose is to use the power of communications to make a better world. It is one of the world’s leading providers of communications services and solutions, serving customers in more than 170 countries.

CONTENTS

2 The Strategic Report Purpose and strategy 2 Overview 2 Our purpose 3 Our goal 3 Our strategy 5 Our culture Delivering our strategy 6 Our business model 6 Financial strength 7 Our people 9 Our networks and physical assets 10 Research and development 10 Brand and reputation 11 Stakeholders and relationships 16 Natural resources 17 Our risks 26 EE acquisition: risks Our lines of business Group performance 47 Our progress against our KPIs 48 Group financial performance 53 Delivering societal and environmental benefits 55 Report of the Directors Statutory information 58 Statement of directors’ responsibilities 59 Independent Auditors’ report – Consolidated financial statements 61 Consolidated financial statements 66 Notes to the consolidated financial statements 110 Independent Auditors’ report – Parent company financial statements 111 Parent company financial statements 127 Subsidiary undertakings 128 Additional information 141 Cross reference to Form 20-F

This is the BT plc Annual Report for the year ended 31 March 2015. It complies with UK regulations and comprises part of the Annual Report on Form 20-F for the US Securities and Exchange Commission to meet US regulations. Please see the cautionary statement regarding forward-looking statements on page 129. In this document, references to ‘BT’, ‘BT plc’, ‘the group’, ‘the company’, ‘we’ or ‘our’ are to British Telecommunications plc and its subsidiaries and lines of business, its internal service unit, or any of them as the context may require. References to ‘BT Group plc’ are to BT plc’s ultimate parent company. A reference to a year expressed as 2014/15 is to the financial year ended 31 March 2015 and a reference to a year expressed as 2015 is to the calendar year. This convention applies similarly to any reference to a previous or subsequent year. References to ‘this year’, ‘the year’ and ‘the current year’ are to the financial year ended 31 March 2015. References to ‘last year’ and the ‘prior year’ are to the financial year ended 31 March 2014. ­

802639 BT Group PLC.indb 5 5/19/2015 1:07:16 AM 2 BT plc Annual Report & Form 20-F 2015

The Strategic Report PURPOSE AND STRATEGY

OVERVIEW Our purpose British Telecommunications plc is the principal operating subsidiary BT’s purpose is to use the power of communications to make a of BT Group plc. We are a wholly owned subsidiary of BT Group better world. plc. The BT Group plc Board has ultimate responsibility for the We are here to meet the needs of our customers, delivering the management of the group and the Operating Committee of BT experience, products and services that matter to them. Millions Group plc is the key management committee. It monitors the of individuals connect through us to their friends and family, and group’s financial, operational and customer service performance have huge amounts of information and entertainment at their and has cross-business oversight of BT’s lines of business. It also fingertips. The smallest companies right through to multinational reviews the group’s key risks and considers the potential threats corporations use our services every day to conduct their business and opportunities to the business. and compete in the global marketplace. Many public services rely The Purpose and strategy, Delivering our strategy, Our lines of on our technologies, and in the UK the telecoms industry operates business and Group performance sections on pages 2 to 54 form across our networks. Our success as a business depends on the Strategic Report. delivering value to all our customers, enabling them to fulfil their needs and aspirations. We present the audited consolidated financial statements on pages 61 to 109 and 127. The connectivity we provide every day plays an essential role in modern society and economies. Our core business represents a significant part of the social infrastructure in the places where we operate.

The diagram below shows how our strategy supports our goal and purpose. It sits at the centre of our business model.

External environment

Governance

Our purpose To use the power of communications to make a better world

Our goal A growing BT: to deliver sustainable profitable revenue growth

Our strategy Broaden and deepen our customer relationships

Deliver superior Transform Invest for customer service our costs growth

Outputs & Inputs Value creation Outcomes Mobility Leading TV and UK business Fibre and future global content markets voice companies

Our culture A healthy organisation

Our values Customer Team Honesty Change Pride We are We help We are honest We all make We are proud here for our each other and respectful change to make a customers achieve more happen difference

Risks

The Strategic Report was approved by the Board of Directors on 13 May 2015.

By order of the Board Tony Chanmugam Director

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It is because we recognise how important connectivity is today that key processes relating to installations and when customers move we also work to extend the value we can add to communities where house. we operate and to society at large by finding new ways that our We have made some good progress in these and other areas, products and services can bring social and economic benefits. We including: are committed to using our technologies to respond to the climate change challenge. And we enable our people to contribute their skills • recruiting 2,500 new engineers; and energies to make a positive impact in areas of social need. • over 1,000 system and process changes to make it easier for our customers to deal with us and to help our people support It is by creating value for our customers and society that we will them. This includes improving our websites so that it is more satisfy the needs of our shareholders – and deliver sustainable straightforward to make and track orders, and find information profitable revenue growth. and help more easily; Our goal • investing in our network to make it more resilient to extreme Our goal is to deliver sustainable profitable revenue growth. weather conditions (in both summer and winter); • specialist diagnostic equipment, alarms and new handheld Previously, we have had to depend on cost transformation to grow devices to help our engineers find faults quickly, increasing their our cash flows. In the years ahead, revenue growth, combined with ability to get to the root of the matter and fix more issues in one continued transformation of our costs, will provide a powerful go; and platform for long-term and sustainable cash flow growth. • deploying a new appointment booking system for calling We will reinvest some of the cash we generate back into the business, customers back and providing training in communication skills to enable us to grow over the long term. A virtuous circle. And we will for our advisers. also use it to reward our shareholders and other stakeholders. But we still want to do better. Looking ahead, we are focusing on five key areas: Our strategy Our strategy is founded on broadening and deepening our customer relationships. Acting on We are using the insight of our customers, our insight people and other companies to guide decision- To deliver sustainable profitable revenue growth, we need stronger making and create products and services based relationships with our customers. That means making sure we stay on the changing demands and priorities of our relevant to them as markets, lifestyles and technologies change. customers. And as we explain below, we are developing a new way to analyse the effectiveness of The three pillars of our strategy help us do that: delivering superior our processes from the customer’s perspective. We customer service; transforming our costs; and investing for growth. will use this insight to improve the way we do things. The better our customer service, the more we will sell and the less time and money we need to spend putting things right. And the Keeping our We are making our products and networks more customers resilient. Monitoring our networks and ordering better we manage our costs, the better value for money we can connected systems will help us identify issues sooner – in many offer our customers and the more we can invest in giving customers cases before the customer is even aware there is an what they need, today and tomorrow. And these principles in turn issue. drive our business model (see page 6). Creating great We are improving the way we keep customers Deliver superior customer service tools and informed. We continue to develop our websites, Every day we touch the lives of millions, providing services that systems offering more self-help features and online support. help people get the most out of their working and personal lives. Engineers are letting the customer know they are We recognise how important it is to improve service as the impact on the way before arriving at the premises. And when things go wrong is greater than ever before. Getting the we are trialling an app to help customers track the whereabouts of their engineer before a visit. customer experience right will not only benefit our customers, it will make our business more cost effective too. Customer service Working better We are changing the way our customer-facing teams and cost transformation go hand-in-hand. across our are organised so that our people can take greater organisation ownership when they are dealing with customers’ To make sure we are equipped to meet the changing and enquiries. We have adopted a new approach to help growing demands of consumers and businesses, a group-wide us analyse and improve how we perform in typical transformation, to put the ‘Customer First’, is underway. You can customer interactions, like ordering a service from us find out more on page 7. or reporting a fault. And further analysis of our repair process is helping us to understand what we need to Right First Time (RFT) is our key measure of customer service and do to make the customer experience better. tracks how often we keep the promises we make to our customers. Our overall improvement of 4.7% (2013/14: 1.5%) reflects Supporting As well as redesigning processes, systems and positive contributions from each of our customer-facing lines of our people policies, we are urging our people to put themselves business. We achieved significantly better repair performance in their customers’ shoes, take personal ownership and delivery times for providing UK lines and broadband. Within of issues and make it easy for our customers to order BT Global Services, we made large improvements to our speed of and use our products and to contact us when they delivery. But we still want to do better. You can find more details in need to. the line of business section on operating performance. The wellbeing of our people is important to us and helps them deliver a good service to our customers. Customer service is one of the factors used in determining the This is particularly true in Openreach which has annual bonus of executives. It is made up of the RFT metric and a experienced a rise in sickness absence rates among new customer perception measure. some of our older workers. We are focusing on early In last year’s Annual Report we outlined a number of specific areas intervention to address this and we provide support services to help all our people return to their roles. that we would focus on this year, including investment in our You can find more details on page 7. network, improving our online capability and changing some of the

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Transform our costs Looking ahead, we are focused on a number of areas including: We run large and complex cost transformation programmes which • reviewing the effectiveness of our sales teams; to reduce are led by a team of internal consultants. They are BT people. This administrative effort and focus people on what really matters – makes sense because they know our business better than anyone. selling to customers; ensuring we have the right people, with Their approach is based on a methodology honed over ten years and the right skills, aligned to the best opportunities in the market; underpinned by forensic data analysis, strong governance and the and by revising our incentive schemes to better align with support of senior management to make change happen quickly and desired outcomes; sustainably. • large end-to-end programmes specifically focused on improving customer experience in a number of delivery and This year, our underlying operating costs excluding transit were repair journeys through reducing waste in the process and down 2%, reflecting an 8% reduction in net labour costs and lower making it easier for our customers to interact with us; payments to other telecommunications operators. These were partly • rationalising and standardising our products, networks, offset by increased programme rights charges reflecting a full year applications and platforms to remove complexity and reduce of BT Sport. We reduced our operating costs by around £600m this the cost of failure; and year. Over the last six years we have reduced our operating costs and • reviewing the effectiveness and efficiency of the back-office capital expenditure by around £5.5bn. teams that support our customer-facing people. Our largest cost transformation activities are driven ‘top-down’. We benchmark what it costs us to do business against other large They might be end-to-end programmes spanning multiple lines telecommunications companies. We keep making progress but we of business or complex changes contained within a single line of can still see more that we can do. We also look beyond the world business. Continuous Improvement (CI) provides a complementary of communications to see what lessons we can learn from other ‘bottom-up’ approach. CI makes small but important changes to industries. We are confident that there are plenty of opportunities to how we do things every day and has the added benefit of improving reduce costs further. employee engagement. You can read about cost transformation within our lines of business To strengthen cost transformation (CT) and its application from page 29. And the group’s performance on operating costs is throughout the business we have an in-house CT Academy. The described on page 48. CT Academy is responsible for the continued development of our change professionals. This year alone it has trained and coached more than 1,800 people. BT is the only UK organisation currently licensed by the British Quality Foundation to certify qualifications to the most advanced levels in Lean, Six Sigma and Change Management methodologies on such a scale. Programmes this year included: • taking tried-and-tested methods from the UK and using them overseas to reduce cost of failure, improve efficiency, streamline organisational structure and get better value for money from suppliers; • identifying how we can improve the utilisation of our engineering teams and standardise the way they work. We can reduce the number of engineers required at a particular location by investing in their training to make sure they are multi-skilled. This programme has identified opportunities to reduce costs while shortening delivery times on core products like Ethernet; • tightening up our contact centre operations by closing down small, inefficient centres, standardising technology and processes and rebalancing and reprioritising activities between the UK and overseas. (Better tools, training and utilisation of our service colleagues have made them more productive and helped them answer enquiries from customers more effectively); • reducing the cost of failure across the lifecycle of our IT systems. By designing and developing them better, they fail less often, improving service and reducing cost; and • launching our new group-wide Central Business Services capability, (effectively a shared service centre), to support contract management and accounting, procurement, financial services and HR. This simplifies the way we work and means we can share best practice to improve efficiency and service.

802639 BT Group PLC.indb 4 5/19/2015 1:07:16 AM The Strategic Report 5 Purpose and strategy

Invest for growth Proposed acquisition of EE by BT Group plc We are investing in five strategic areas. These are the things we In February 2015 our ultimate parent, BT Group plc, announced that we had believe will deliver sustainable profitable revenue growth – which agreed definitive terms to buy EE, the leading mobile network operator in the will deliver value for our shareholders: UK, for a purchase price of £12.5bn. The deal, which is still subject to merger clearance, will be transformational Fibre Customers are asking for faster broadband. We are for BT. It will allow us to accelerate our mobility strategy. And it will increase delivering that with our superfast fibre broadband our capacity for future investment and innovation in networks and services, deployment. It covers more than three-quarters of as we continue to build world-class digital infrastructure in the UK. the premises in the UK and we are working to extend We believe the deal will generate considerable value for BT Group plc’s its reach even further (see page 42). shareholders. We expect net cost synergies to be worth £3.0bn (after We have long been at the forefront of fibre integration costs) and we expect to generate revenue synergies with a total a innovation and investment and we aim to keep net present value of approximately £1.6bn . it that way. In January, we set out our vision for The transaction should be accretive to free cash flow per share in the first full ultrafast broadband. With the right regulatory and year post completion of the deal. investment environment, we plan to transform the UK broadband landscape through the widespread By combining EE with BT, we will be able to provide customers deployment of G.fast. We expect G.fast to deliver with innovative, seamless services that combine the power of fibre speeds of a few hundred Mbps by 2020 and up to broadband with wi-fi and advanced mobile capabilities. 500Mbps to most of the UK within a decade. We will also introduce a 1Gbps premium fibre broadband Our culture service (see page 45). To deliver strong performance we have to be healthy. A healthy organisation is made by the structures and processes that help TV and content We have improved our TV proposition this year. We redesigned its look and feel and enhanced the people do their jobs effectively; and the attitudes and actions of all service – adding things like TV Everywhere, buy-to- individuals. keep movies and TV shows, Netflix and the BT Sport We have defined our values to guide how we want to work. We have Extra red button. We also launched Sky Sports 1 and identified the changes we need to make: putting the customer first 2 on YouView. in everything we do, simplifying how we work and developing a We won the rights to show more live FA Premier leadership style which helps to drive change and gives people the League football matches for three years from August confidence to take responsibility. We believe people want to work 2016, and extended our Aviva Premiership Rugby with a company that recognises what they have to offer, supports rights to the end of the 2020/21 season. their ability to grow and is a positive force in wider society. By This summer, BT Sport will become the new home of making all of this happen we will create an environment that brings UEFA Champions League and UEFA Europa League the best out of our people. football for the next three seasons. Becoming a healthy organisation will enable us to deliver our Read more about these developments in the BT strategy. It is about ensuring we can be resilient and agile in a Consumer section on page 36. changing world and, at the same time, make BT an exciting place Mobility and 2014/15 was a watershed year for us. We launched where our people can all be proud to work. future voice three new products in our business IP voice portfolio (see page 34), returned to the consumer mobile market (see page 37) and our ultimate parent company agreed definitive terms to acquire EE. As explained below, this deal will make us the UK’s leading converged communications provider (CP).

UK business There are clear opportunities for us to grow our share markets of the UK business market and increase the revenue we get from each customer. So we have improved our product portfolio and are focusing on selected areas of IT services where we can grow, such as data centres, cloud, managed hosting and security (see page 34).

Leading global We are investing in our services, network and companies expertise to increase our share of spending by our large multinational customers. By extending our global network and data centre footprint (see page 31), we are expanding the reach and features of our services, making them more flexible and better at working together. We are helping our customers address their challenges in the world of digital business, from cloud and collaboration, to mobility and security. By investing in customer service and global account management capabilities, we continue to support leading global companies as they expand into new markets. And help public sector organisations to better serve citizens.

a For the assumptions underlying our synergies estimates, see Additional Information on page 139.

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Delivering our strategy

This section explains how we deliver our strategy. We describe our Outcomes business model and the importance of our people, assets and the The financial outcome of what we do hinges on the performance research and development we do. We report on the status of our of our lines of business. Together they contribute to the overall brand and outline our relationships with our main stakeholders. performance and key performance indicators (KPIs) of the group. We also explain our approach to human rights and describe the But there is more to what we do than just financial value. What regulatory environment and risks that affect us. we do matters. We help millions of people communicate, be entertained, do business and generally live their lives. We help our Our business model customers reduce their carbon footprint, for example by providing Our business creates value for shareholders, by delivering for conferencing facilities, which mean they do not have to travel as customers, society and our people. much. And we contribute directly to communities and the health of We invest to build and maintain communications networks in the the UK by providing jobs, working with suppliers and paying tax. UK and overseas; we develop products and services that run over All of which contribute to the strength of our brand – a key asset for those networks; and then we sell them on a subscription basis to us as it can influence whether a potential customer buys from us or consumers, businesses and the public sector. By selling services, one of our competitors. we are able to make a return on our network investments and create value for our stakeholders. This means we can reinvest in the How we create value business to keep creating value over the short, medium and long Delivering a superior customer service, transforming our costs and term. A virtuous circle. investing for growth in our five strategic areas are central to both our strategy and business model. They are key business activities. The way we describe our business model is evolving. This year, Better customer service means that we spend less time and money for the first time, we include elements of the IIRC’s Integrated putting things right. These cost savings, combined with savings from Reporting (IR) Framework. In the Framework, the resources used working more efficiently and the cash that we generate from sales, and the relationships affected by an organisation are collectively mean we can invest in the future of our business. referred to as ‘the capitals’. The IIRC defines the capitals as: financial, manufactured, intellectual, human, social, and natural. We have Our ability to deliver our strategy is as much about how we do adopted a similar approach by using a common set of icons for the things, as what we do. That is why being a healthy organisation (see inputs, outputs and outcomes of our business model, although we page 7) and living our corporate values (page 7) are so important describe them in terms that are most meaningful to our business. to us. Our values reflect how we work together in BT to create a healthy, high-performing business. And that is why our people are so Inputs key to the success of our business. Our business model starts with the things that set us apart from our competitors. We have a strong combination of people, technology, Our sustainable business model networks and other physical assets. Our research and development Communications markets are very competitive, particularly in the activities support innovative new ways of doing things and UK. There are both opportunities and risks. We make sure we stay in advancements in our technology. And we have the financial strength tune with market and competitive trends through teams dedicated to invest in these areas to stay ahead of the competition. to ‘insight’. And we undertake an annual materiality review to understand the societal and environmental issues that are important Then there are the relationships we have with our stakeholders such to our stakeholders. as our customers, and the natural resources we consume as part of doing business. BT’s Enterprise Risk Management framework (see page 17) helps us identify and mitigate the challenges and risks we face. And we use Outputs governance committees to make sure we make the right investments The main output of our business is our portfolio of products and and deliver products and services that customers want to buy. We services. We make money by selling these in the UK and around the see more and more demand for our products and services because world through our customer-facing lines of business. they play such an integral role in modern life. We sell through a range of channels including online, contact centres Being able to anticipate and respond to changes in our environment and desk or field-based account managers. Our revenue is mostly makes for a flexible and sustainable business model. And by subscription or contract-based. People, households and SMEs pay continuing to reinvest in the business, we are confident that we will for standalone or bundled services monthly, quarterly or annually be able to deliver value both today and in the future. (typically on 12 to 24 month contracts). Large corporate and public sector customers usually buy managed networked IT services on Financial strength contracts spanning several years. Our wholesale customer contracts We have the financial strength to make bold decisions and to range from one month in length for regulated products, to five years invest in the things that set us apart. or more for major managed services deals. Our goal is to deliver sustainable profitable revenue growth. Improving the skills and expertise of our people, both through Together with further transformation of our costs, we aim to grow on-the-job experience and our investment in their training and our EBITDA and cash flow over the long term. development, is another output of our business. We also generate We have a prudent financial policy that governs how we use the cash intellectual property like patents. Finally, the waste and emissions we generate. produced by our operations are considered to be outputs (more details of what we are doing to minimise these can be found on We want to continue to invest in the future of our business and in page 16). particular in our five strategic growth areas (see page 5). At the same time as investing in these areas, BT Group plc intend to reduce the group’s net debt over the medium term and are targeting

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a BBB+/Baa1 credit rating. We have a strong balance sheet today, the UK, 2,100 people were redeployed, meaning that we retained but we want to make it stronger. experienced people with the skills we need for the future.

We will also continue to support the pension fund and to do so in A customer-facing workforce a responsible way. And we will pay progressive dividends to our This year we recruited 2,500 new engineers and more than 500 new shareholders. service colleagues to work in our customer management and contact We aim to balance the interests of all stakeholders. centres. We created 1,100 jobs in the UK that were previously performed by agencies in the UK and overseas. We believe that this approach provides us with the financial flexibility to make long-term investments in the best interests of the group; Our Customer First programme supports our business strategy by and also in the best interests of communities where we operate. making sure our people have the support, skills and confidence to give our customers a great experience. Examples include: It is this approach that means we can invest over £3bn to help take fibre broadband to 90% of the UK. And our financial strength • innovative apps to give engineers better access to information means we can go even further. We will work with government to (see page 45); help take fibre broadband to 95% of the country. And with the right • training in communication skills to cut out jargon and investment and regulatory environment, we will invest in ultrafast complexity; and broadband to deliver up to 500Mbps to most of the UK within a • reorganising teams to focus on the needs of customers at decade with 1Gbps available to those who want even faster speeds. specific points in their relationship with us. Our financial strength has also underpinned the investments we We are making use of internal social media tools to encourage have made in BT Sport both this year and last, and which we will colleagues to share best practice, ask each other questions and continue to make in the years ahead. And it meant that in February celebrate the progress we are making. 2015, BT Group plc could announce the proposed acquisition of EE, The Customer First Challenge Cup is a key people engagement the leading mobile network operator in the UK. programme in BT. It is an annual competition that started in 2003. It also means we can support the business in other ways. For It encourages people to form teams and come up with the best ideas example, by making sure we continue to innovate and stay at the for changing business processes in ways which save money or deliver forefront of a rapidly-changing industry. And by investing in the improvements for our customers. This year over 5,000 people came training, development and support we give to our people, as we together to form over 800 teams across 17 countries. The number describe below. of people participating has increased year on year, with 60% of those involved this year doing so for the first time. Our people Investing for growth Every day our people touch the lives of millions, providing services Learning matters at BT. We want our people to build their skills and that help our customers get the most out of their work and careers and our Academy helps them do this. personal lives. We invest in our people so they can succeed and contribute effectively to our business. The Academy is BT’s new approach to learning. It is not a physical place or building, it is home to a combination of materials, events, Believing in what we do programmes and knowledge-sharing activities which help our A clear purpose guides everyone’s contribution in BT. By bringing people learn in different ways. The Academy is organised across together the best networks, technology and products and services four ‘faculties’: Leadership, Technical, Customer and Business. Each for our customers, we use the power of communications to make a faculty supports a number of communities we call ‘professions’ better world. which have similar learning and career journeys. Living up to our values in everything we do will help build the kind of We have made accessing a profession easy by investing in an business our people are proud to be part of. Our values are: innovative social collaboration platform – helping people to develop Customer: We are here for our customers. their skills and careers together. Team: We help each other achieve more. Around 9,600 leaders – from senior executives to junior managers Honesty: We are honest and respectful. – have learnt new ways to lead, coach and support their teams. Change: We all make change happen. And a global programme is giving 5,600 frontline people the skills, Pride: We are proud to make a difference. tools and techniques to continuously improve the way we serve A global workforce customers. At 31 March 2015 we had 88,500 full-time equivalent (FTE) We intend to recruit around 1,000 graduates and apprentices in employees in 60 countries, with 70,900 of them based in the 2015/16. And we are also offering up to 1,000 vocational and UK. We are one of the largest employers in the UK, supporting its work experience placements to 18-24 year olds as part of the UK economy by providing jobs and income. employer-led initiative, ‘Movement to Work’. This is backed by the This year we recruited over 9,900 people. Of these, more than Prince’s Trust and the Government. 5,300 work in the UK, including over 500 who are on our renowned A healthy organisation – employee engagement and involvement apprenticeship scheme. We are becoming a healthier organisation. Our plans to improve Across our global business we continue to simplify the way we organisational health have included the creation of the Academy, the work, for example, by transforming our HR and finance systems and implementation of ‘Continuous Improvement’ initiatives throughout services. This makes things easier for our people, so we can serve our the business and an award-winning leadership development customers better. programme. As our business evolves to meet the needs of our customers, Each quarter about 35,000 people provide feedback on working for we adapt our organisation, redeploying people through the BT BT through our employee engagement survey. Our surveys help us transition centre. This helps us avoid redundancies. Last year in develop a focused people strategy and support action planning at a

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local level. We have maintained engagement levels at 3.82 (out of Volunteering a maximum of 5, with a telecoms benchmark of 3.90), the highest It is a source of great pride to BT and our people that so many level since we started the survey in 2008. colleagues volunteer. This year, more than 22,700 (26%) of our colleagues (up 62% from last year) spent 53,000 days supporting We keep our people informed about company results, major business more than 3,700 charities and community groups around the world. decisions and other things that affect them using a variety of digital Our people can use up to three working days a year to support channels. Leaders regularly connect with their teams through causes that matter to them. This means they can have a real impact roundtable meetings, town hall debates, site visits, webcasts and in the communities where they live and work. Our ambition is that by blogs. 2020, two-thirds of BT people will be volunteering time to support We consult with our people or their representatives on a regular good causes. basis, taking their views into account on decisions that affect them. More than 5,300 (2013/14: 2,200) people took part in In the UK we recognise two main trade unions. The Communication volunteering specifically as part of a team. Specialist BT teams Workers Union represents people in engineering, administration and helped charities with particular issues which needed our expert input clerical positions. Prospect represents managerial and professional and knowledge. Other BT teams used their energy and enthusiasm to people. make a practical difference in local areas. Diversity at work Charities supported in this way include Place2be, a UK children’s At BT we believe that we unlock the power of our people when mental health charity which we helped with their communications we value their diversity. This is a priority for us because a diverse strategy, and Leicester Outdoor Pursuits Centre where we helped workforce fosters greater innovation, helps us better understand and build equipment to enable wheel chair users to access an abseil serve our customers and empowers our people to deliver their best. tower. In Spain, BT’s human resources team helped young people Business in the Community benchmarks consistently rank us in the facing severe financial issues prepare for work. And in Hungary, 50 top-ten private sector organisations for women and people from BT volunteers improved the living conditions in a young people’s Black and Minority Ethnic (BME) backgrounds. And as a ‘Two Ticks’a refuge in Budapest. employer, we are committed to attracting, developing and retaining In India, more than 80 BT volunteers, working with our local partner people with disabilities. Applicants with disabilities or long-term Katha, continued to support the Katha Information Technology and health conditions – and who meet the minimum criteria for the E-commerce School (KITES), a charity which provides ICT training vacancy – are automatically put through to the first stage of the for children in one of Delhi’s largest slums. Over 19,000 children recruitment process. have already completed ICT courses. KITES also supplies more BT was again named this year as one of The Times Top 50 general schooling for children and teaches business skills to women. Employers for Women. But we have the ambition to move further Mridul Srivastava from BT Global Services won this year’s Chairman’s and faster. We are determined to drive up the number of women Award for his contribution to society and the lead he has taken in in our workforce. 19,655 women currently work for us – many encouraging volunteering at KITES. on flexible contracts, giving us a full-time equivalent of 18,457 Pay and benefits female employees. This corresponds to 10,358 FTE (25%) of our We compare salaries with other companies in our markets to make management population and 8,099 (17%) of our team members. sure our packages are competitive. In the UK, pay for the vast At BT Group plc Board level, our policy is to aim to have at least majority of our engineering and support people is determined 25% female representation. We were below this for part of the by collective bargaining, with fair terms and conditions for all. year, but with three out of 11 Board members, we now have 27% Managers’ pay and bonuses are linked to business performance and female representation. We are working to attract more women into their personal contribution. BT and our sector. And we are reviewing our working practices and Our executives are offered long-term incentives to align their reward development opportunities to make sure that an increasing number with the creation of shareholder value. The amount ultimately of women can enjoy successful careers with us. received depends on BT’s performance over a three-year period. Staying safe and well In accordance with our regulatory obligations, incentives for senior Our people tell us wellbeing has improved by 2% across the leaders in Openreach are tied to its business performance rather than company. We have made good progress on reducing accidents that of the wider group. while working. The Lost Time Injury rate came down by 23% to 1.5 We also provide a range of pension and retirement plans for incidents per million working hours. However, the changing age employees globally, either through dedicated company plans or by profile of the business presents some challenges for us as mature and contributing to state retirement arrangements where applicable. experienced workers are replaced by younger people who sometimes You can find details of the BT Pension Scheme and other retirement have a different attitude to risk. We have targeted our training to plans on page 51. address this. Sharing in success Sickness absence rates have increased by 6% to 2.2%. There are Around 60% of our people take part in one or more of BT Group differences between the lines of business with a steady reduction in plc’s savings-related share option plans (saveshare), which operate most of them but a sustained increase in Openreach. Here, mental ill in over 25 countries. In August 2014, over 22,000 people in the health and musculoskeletal disorders in older workers are the main BT 2009 saveshare plan were able to buy shares at 61p, causes. The increase in sickness absence is mainly because people are representing an average gain of around £41,000 each. Around having to take more time off. Extended absences (over one month) 7,000 of these people, who participated at the maximum allowed, now make up two-thirds of all lost time. were able to buy shares worth just under £90,000 (based on the Our focus is on early intervention to improve attendance. And our share price on 31 July 2014). We believe this was one of the largest support services help around 93% of people return to their role on ever payouts by a UK plc for an all-employee saveshare plan. full duties.

. a The Two Ticks is an accreditation that is given to organisations that are committed to employing disabled people.

802639 BT Group PLC.indb 8 5/19/2015 1:07:17 AM The Strategic Report 9 Delivering our strategy

Our networks and physical assets Service platforms Our networks, service platforms and IT systems are the foundations We run a number of service platforms that combine our network and of the products our customers rely on around the world. IT resources to underpin many of the key products we offer. These include: Network platforms Our global reach • BT Conferencing, which we offer to our customers around the Our global network provides service to more than 170 countries world. BT MeetMe is our audio conferencing service. It is also and is supported by in-country networks and infrastructure. Most available with Dolby Voice for higher quality sound and a better of our network assets are in the UK and Europe. We continue to user experience. selectively expand the reach of our network to support multinational • BT Cloud Contact, one of our contact centre solutions. For companies in other regions. example, this has helped Etihad Airways better serve their customers. Callers from 37 different countries are automatically The scale and reach of our global multi-protocol label switching directed to the right language team, in any one of three global (MPLS) network is a key competitive differentiator. This single contact centres. IP-based network lets our customer-facing lines of business launch • Our BT TV platform, which we have invested further in to and sell products and services quickly and cost-effectively, without support a growing number of customers and to increase the needing to invest in dedicated infrastructure for each product. range of services we can deliver. We have added ‘red button’ To serve our multinational customers we offer our virtual private interactive features. Our new ‘Extra Box’ service provides network (VPN) services. To provide these, we use our MPLS network multi-room viewing. And our people have implemented the and a combination of owned and leased fibre connections to technology to support our TV Everywhere service, and ensure interconnect our points of presence (PoPs) around the world. For the Chromecast and Netflix services are compatible with BT TV. final connection into the customers’ premises, we either use our own existing circuits, or rent connections from telecoms operators in that IT systems country. We also have an extensive satellite network which provides Our internal IT systems enable us to manage our processes, handle customers with connectivity around the world, including to remote customer information and deliver our products and services. They and hard-to-reach locations. are critical to serving our customers and running our business. Our global IP Exchange platform (GIPX) continues to do well. Around For example, our customer management systems hold our customer 400 service providers are connected to it globally and this year we and billing information. They include the technology that is used launched a new node serving the Middle East. when customers call a contact centre, and behind our online customer portals. In-country networks We have extensive networks in the UK, as well as in Germany, Italy, We are making our systems simpler. And we are continuing to the Netherlands, the Republic of Ireland and Spain. innovate. Last year we launched a system to analyse our own ‘Big Data’. We have seen the benefits of it this year. It has provided Our UK fixed-line network is one of our most valuable assets and our greater insight into potential line faults which has reduced the investment in fibre broadband is key to delivering modern, superfast number of unnecessary engineer visits. services to our customers. To meet the demand from businesses, we are continuing to expand the availability of Ethernet. And when our We currently have around 25 petabytes of data storage customers are away from their home or office, they can use one of infrastructure spread across several sites. (If this storage was full of more than 5m BT Wi-fi hotspots. MP3-encoded songs they would take about 50,000 years to play). We expect the amount of data that we store to grow. Despite this, Developments this year we are working on reducing the number of data centres we run, This year we have: removing older server technology and using fewer IT applications. We are able to do this while increasing our storage capacity by using • improved our UK broadband network at the same time as ‘virtualisation’. This increases our data centre utilisation by running reducing its running costs. We have made it more resilient to many ‘virtual machines’ on each server. faults and it can now better cater for increases in traffic. And we have continued to extend the reach of our fibre network (see We are incorporating many innovations into our data centres to page 42); improve performance and power efficiency, as well as reduce cost. • engaged with our MVNO partner, EE, to develop new mobile Developments such as adaptive power management and hot/ services that have allowed BT Consumer to re-enter the mobile cold aisle isolation help us to reduce power usage. These and other market; programmes will help us cut our IT energy use over the coming years. • been developing the core network systems and radio infrastructure to be able to use our own 4G spectrum. This work Properties focuses on small-cell, in-building solutions; We occupy around 6,350 properties in the UK and around 1,730 in • built the systems that will lay the foundation for the next the rest of the world. Most of our UK properties are owned by and generation of IP-based communication and future voice leased from Telereal Trillium, part of the William Pears group, after services; we entered into a sale and leaseback arrangement with them in • rationalised our voice and legacy data networks so we are using 2001. less equipment and less energy; and Our freehold sites include our main strategic buildings: BT Centre; • simplified the technology we use to provide all of our global the BT Tower; and our R&D facility, Adastral Park in Suffolk. network services (IP Connect, Ethernet Connect and Internet Connect). By using a single network router, rather than one for Of our UK properties, 95% are operational, housing telecoms each service, we are able to reduce the cost of introducing these and broadband equipment. The rest are offices, customer contact services. This has enabled us to offer Ethernet Connect and centres, engineering depots, data centres and our BT Sport TV Internet Connect in eight new countries and 38 new cities on studio. our own network this year.

802639 BT Group PLC.indb 9 5/19/2015 1:07:17 AM 10 BT plc Annual Report & Form 20-F 2015

In the UK we continue to drive our programme of disposing of office (US), Tsinghua University (China), Khalifa University (UAE) and over and operational buildings we no longer need while consolidating 30 other universities globally. We continue to support a programme office space in the remaining properties. This year we completed of co-innovation with start-ups in London’s Tech City. And our the closure of Keybridge House, a former international telephone teams work with customers and other companies in the US, Asia, and telex exchange in London. We sold this surplus building to Europe and the Middle East. They help us track the very latest global Mount Anvil for £93m in February 2015 realising a profit of £67m. developments in new technologies, business propositions and In addition, we have recognised a £45m charge in specific items for market trends. onerous leases as a property rationalisation cost (see page 48). Our people help us innovate and improve our service to customers. Outside the UK, 91% of our buildings are operational, housing our This year our award-winning internal New Ideas Scheme had more hosting and telecoms equipment. The remaining 9% are offices. This than 2,000 submissions. As a result, we have identified more than year we opened new offices in Gurgaon, Bangalore and Kolkata, as £30m of benefit through new revenues and lower costs, and it is part of our strategy to invest in high-growth regions and support helping us provide a better service to our customers. leading global companies. We also closed 25 offices around the We run innovation showcases for our major customers, where they world that we no longer needed and delivered a net reduction of can discuss applications and solutions with our experts. And we get 14 operational sites which helped our cost transformation. to hear first-hand what they need.

Research and development Under the brand of ‘Ingenious’ we are sharing BT’s innovation story BT has a long history of innovation, starting from our roots as The with thought leaders, governments and the media. You can read Electric Telegraph Company (the world’s oldest telecommunications more about Ingenious on page 11. company) in 1846. Examples of our activities this year include: For example, in 1926 we held the world’s first two-way, trans- • Working on how to improve the future 4G mobile experience for Atlantic conversation by radio telephone from our wireless our customers through the use of ‘femtocells’. These are low- station near Rugby. And in 1943, Tommy Flowers, working in the cost, easy-to-install, low-powered devices that could be placed telecommunications division of the General Post Office, developed in customers’ homes or offices and in some cases offer a viable the world’s first programmable electronic computer, Colossus. In alternative to traditional mobile masts. 1968, we installed the world’s first digital telephone exchange. And • Performing extensive lab evaluations and field trials in the we laid the world’s first purpose-designed optical fibre submarine access network. This will help us provide higher broadband cable in Loch Fyne, Scotland in 1980. speeds even further from the exchange. We have been In the 30 years since the privatisation of BT in December 1984, we instrumental in the ratification of the ITU G.fast standard that pioneered many of the technologies that our business now relies paves the way for the next generation of ultrafast broadband on. For example, we were at the forefront of defining the global IP over copper. and broadband standards which mean our networks are capable • Investigating new ways to deliver TV services over our of supporting the advanced video, business and internet services broadband network. Our trial of Ultra HDTV, streaming the we have today. We were the first company to commercially launch 2014 FIFA World Cup, was a world first. single-mode fibre optics – the technology that underpins today’s • Focusing on many aspects of customer service, such as high-speed networks. And we pioneered a technology that uses increasing the number of ‘quality of experience nodes’ in the compressed air to blow fibre optic cables through conduits, which network where we monitor service performance. These help us speeds up network installation. make sure that services like Netflix, BBC iPlayer and YouTube are performing well on our network. Innovation, supported by our global research and development • Examining how we can use our technology in new ways. We are (R&D), enables us to offer the new services that customers want, a major partner in MK:Smart, a UK-based Internet of Things and to find ways of doing things more efficiently and at lower cost. (IoT) programme in Milton Keynes. It is addressing the challenge This year we invested £502m (2013/14: £530m) in research and of supporting economic growth without exceeding the capacity development. We are one of the largest investors in R&D of any of urban infrastructure. For example, by using sensors that a company in the UK, and globally in the telecoms sector . assist city centre vehicle parking and reduce traffic congestion. Since BT’s privatisation we have had over 13,000 patents granted Brand and reputation and in 2014/15 we filed patent applications for 93 inventions Innovation is an important part of our history and an essential (2013/14: 89). We routinely seek patent protection in different ingredient for our future. It is also key to our brand – one of our countries and at 31 March 2015 we had a worldwide portfolio of most important assets and a vital source of competitive advantage. more than 4,500 patents and applications. We believe that well-managed brands drive business performance We bring together expertise and resources (both our own and because they stand out in crowded markets. third-party) at our six global development centres. Adastral Park, our Our brand promise is about ‘creating possibilities’ for customers. technology headquarters, is home to over 65 high-tech companies. It is rooted in our company purpose of using the power of It is a world-leading innovation campus, employing around 3,700 communications to make a better world. people. This year we have continued to grow our development centres in Kuala Lumpur and Bangalore. These give us local technical Valuation consultancy Brand Finance reported in February expertise and spread our development more evenly around the 2015 that the BT brand is now worth US$16.2bn. This is a 6% world. improvement on a year earlier and makes us the eighth most valuable telecoms brand in the world. We are keen to work with people outside BT, from small start-up companies to some of the best universities around the world. We Our own brand tracking analysis, provided by the research agency have extensive, long-standing, joint-research programmes with Populus, also shows good progress. Among opinion leaders for Cambridge University (UK), Massachusetts Institute of Technology example, more than two-thirds agree that BT is a company that is heading in the right direction. a Comparison based on total R&D spend over 2004/05 to 2013/14. Data taken from EU Industrial R&D Investment Scoreboard, http://iri.jrc.ec.europa.eu/scoreboard.html

802639 BT Group PLC.indb 10 5/19/2015 1:07:17 AM The Strategic Report 11 Delivering our strategy

The marketing industry is also acknowledging our brand • Help 10m people overcome social disadvantage through the transformation. For example, BT Sport was the outright winner benefits our products and services can bring. in the Marketing Society’s 2014 Brand Revitalisation and Brand • Help 5m children to receive better teaching in computing skills. Extension awards. • Help generate more than £1bn for good causes, using our people, their skills and our technology, whilst inspiring two- Partnerships continue to be an important part of the way we build thirds of our people to volunteer. our reputation and show our support for good causes. • Enable customers to reduce their carbon emissions by at least • We were the founding partner of the International Festival for three times the end‑to-end carbon impact of our business. Business which launched in Liverpool in June. A total of 68,600 Creating a connected society delegates from 92 countries attended events over the 50-day Digital inclusion is a key part of bringing our purpose to life. We are programme. helping people on low incomes, with disabilities or who are elderly, • We were the first commercial partner of the British Paralympic to get online. An example of this is BT Basic, a product created Association when it was founded in 1989. To celebrate its 25th specifically for a low income group. This low-cost product, combined anniversary we provided a grant to support grassroots disability with our digital skills programme (Get IT Together), helps those sports clubs across the UK. We continue to support British individuals to make the most of being online. Paralympians on their journey to the Rio 2016 Paralympic Games. We share the increasing public concern about protecting children • We were also an official supporter of the Invictus Games, an online. Through The Right Click: Internet Safety Matters, our international sporting event for wounded, injured or sick partnership with UNICEF UK, we are delivering 600 online safety servicemen and women. This was held in London in September workshops across the UK, with, BT volunteers providing parents and 2014 and involved over 400 competitors from 13 nations. children with practical advice to keep them safe online. We have also invested in tools and resources to educate children and their families Ingenious about staying safe while online. In 2014, we ran a programme of events under the theme of ‘Ingenious’. This included events at high profile locations such as BT Parental Controls is our free, network-based filter that lets the BT Tower and Adastral Park. We launched the UK’s first National families control internet access. In 2014/15 we contacted all our BT Inventors’ Day in December. The event was designed to celebrate Broadband customers to raise awareness of this service. the UK’s rich heritage of invention and inspire the next generation Developing a culture of tech literacy of creative thinkers. It was also a showcase of BT’s long history of Increasingly every aspect of modern life is underpinned by innovation. technology. But, even though young people grow up surrounded We also became the lead principal sponsor of the new Information by technology, many of them do not understand the basic concepts Age gallery at the Science Museum in London. The gallery explores of how it works. This could leave them unable to fully participate how the modern connected world was created through different in society. We want to help build a culture of tech literacy for the technology networks such as radio and television broadcasting, the nation. We want to inspire young people to move from simply being web and mobile communications. technology consumers to embracing the role technology can play in their lives, being confident with computational thinking, and aware STAKEHOLDERS AND RELATIONSHIPS of the way technology and data underpins our social infrastructure. Other than our people, our main stakeholders are: our customers; For more information on how we deliver both societal and business communities; BT Group plc’s shareholders; lenders; our pension benefits, please refer to page 53, where we have outlined our schemes; suppliers; government; and regulatory authorities. progress. Our customers Supporting charities and communities We sell fixed-voice, broadband, mobile and TV products and services Our charity partners help millions of people in the UK and worldwide. to consumers in the UK. For small and medium-sized enterprises, as Our communications technology can help them raise money quickly well as larger businesses in the UK, we offer fixed-voice, broadband, and function more efficiently, so they can focus on what they do mobility, networking and IT services. In both the UK and globally we best. offer managed networked IT services to multinational corporations, MyDonate is our commission-free online giving platform which domestic businesses and public sector organisations. underpins our fundraising and community support. We have Some of our customers are also our competitors. This is because supported various fundraising activities this year including Cancer we sell wholesale products and services to other communications UK’s Stand Up 2 Cancer telethon, Children in Need and Red Nose Day. providers in the UK and overseas. We have also supported Disasters Emergency Committee appeals for Syria, the Philippines, Gaza and the Ebola Crisis – all using our You can read about our customers and the services we provide them MyDonate fundraising platform. In total, all these activities raised in our lines of business section from page 29. £30m this year. Communities and society as a whole We do not just support large scale telethons, but also smaller The investments we make will play a big part in benefiting society charities and individual fundraisers too – with over £21m being and the environment, proving that it is possible to do good and raised using MyDonate to support them. We are investing in new create business value at the same time. technologies and extending the reach of MyDonate, as it is key to Last year, we talked about our 2020 ambitions in three focus helping us deliver our £1bn 2020 goal. areas of creating a connected society, supporting charities and The Supporters Club is our collaboration with our long-standing communities and delivering environmental benefits. This year we charity partner, Comic Relief. It aims to build a better world by have introduced two additional areas – developing a culture of tech bringing people together through sport. We provide grants to literacy and inclusive growth. Our 2020 ambitions are now: support charities and community sport foundations, to use sport as • 9 out of 10 people in the UK will have access to fibre-based a vehicle for change in young people’s lives. BT Sport customers can products and services. make monthly donations of £1, £3 or £5 through their bill.

02a_802639_Report of the Directors_Strategy_p02-13.indd 11 5/19/2015 11:27:56 AM 12 BT plc Annual Report & Form 20-F 2015

Increasing our customers’ sense of connection with The Supporters The mix of our suppliers continues to evolve as we move into new Club, and increasing donations, was a key priority in the year. markets, such as televised sport and mobility. To encourage more people to get involved, we included short films as part of our coverage of live sporting events which showed Our approach to procurement The Supporters Club is making a difference. Customer donations We have around 320 people in 26 countries working with suppliers have raised £1.8m this year, with over 26 projects currently being to deliver our procurement strategy. funded, both in the UK and around the world. We want to get the most from our suppliers – especially from their diversity, skills and innovation. Delivering environmental benefits We serve some of the biggest companies in the world, so helping As part of our cost transformation programmes, we have them reduce carbon emissions can have a global impact. Many of concentrated on making the most of our relationships with our them are sustainability leaders themselves. And more and more of largest suppliers to get even better value. our customers want to know how our products can contribute to their own sustainability commitments. This year we introduced our Purchase Order intercept programme. This involves reviewing all purchase orders to make sure that we are We lead by example, as we are reducing our own environmental optimising our spend across BT. The new Central Business Services impact and minimising waste, and are working with our suppliers centre (see page 4) is supporting our procurement division and is to help them do the same. We have an integrated approach to growing in numbers to support this programme. cost reduction and carbon abatement – that many of our solutions directly reduce our customers’ carbon emissions, save money and We are continuing to review our supply base and have deactivated use fewer resources. For example, our conferencing facilities reduce around 3,300 suppliers from our procurement systems in the the need for travel. last 12 months. Our supply base now includes new categories of suppliers to support our new markets. BT Group plc’s shareholders During the year we launched the Procurement Profession, part of BT Group plc has around 900,000 separate shareholders. Over the Academy (see page 7). This is helping to improve the skills of 20% of them have held shares since BT was privatised 30 years our people. Our ambition is to have all of our buyers accredited and ago. As well as the Annual Report and Annual General Meeting, licensed. And for a few of our expert practitioners to be recognised BT Group plc keeps its shareholders up to date with how we are externally as fellows of the Chartered Institute of Procurement and doing through regular mailings. These often include offers on our Supply (CIPS). Currently we have two practitioners who are fellows products and services that are only available to shareholders. Our of CIPS. website includes press releases, newsletters, presentations and webcasts that can also keep shareholders informed. Choosing our suppliers The majority of BT Group plc’s shares are held by institutional It is important to us that we know who we are doing business with investors. There is an extensive investor relations programme aimed and who is acting on our behalf. So we: at keeping existing shareholders informed and attracting new ones. • choose suppliers using an established set of principles which This programme includes: seeks to make sure both we and the supplier act ethically and • reporting quarterly results, accompanied by a conference call or responsibly; presentation from senior management; • check that the goods and services we buy are made, delivered • regular ‘teach-ins’ on key topics (for example this year we and disposed of in a socially and environmentally responsible covered regulation and cost transformation); and way; and • meetings and conference calls with investors both in the UK and • measure factors such as a supplier’s energy use, environmental around the world. impact and labour standards. In 2014/15, management held 369 meetings or events with You can find out more at www.selling2bt.bt.com institutional investors. This compares with 421 in 2013/14 and Labour standards in our supply chain 259 in 2012/13. We want our suppliers’ employees to experience working conditions BT was voted the best company for investor relations in England in that meet the standards we have developed. We send our suppliers the Extel Survey 2014. Across Europe, we were voted the second an ethical standards questionnaire. Based on their responses, we best in the telecommunications sector. follow up with any suppliers identified as high or medium risk. This year we met 96% of our target to achieve 100% follow-up within Our lenders three months. Our relationships with our lenders, mainly banking institutions and bond holders, play an important role in our treasury and funding We also visit supplier sites to make sure they meet our standards. strategy. These relationships are vital for funding the business and This year we visited 47 sites (2013/14: 54 sites) around the world. meeting our liquidity requirements. To comply with the Dodd-Frank Act and our Securities and Exchange Commission (SEC) obligations, we asked certain suppliers whether Our pension schemes their products contain certain minerals which may have been We operate defined benefit and defined contribution pension sourced from conflict areas such as the Democratic Republic of the schemes. The largest is the BT Pension Scheme (BTPS) which has Congo. In June 2014 we filed the required report covering 2013 306,500 members. You can read more about it on page 51. with the SEC which described our due diligence and reflected the responses we received. We will file the report for 2014 in Our suppliers Our suppliers from across the world play a vital role in helping us to June 2015. provide our products and services and deliver our strategy. We spent £9.4bn with our suppliers this year (2013/14: £9.8bn). The top 100 represent around 61% of our annual spend.

02a_802639_Report of the Directors_Strategy_p02-13.indd 12 5/19/2015 11:27:57 AM The Strategic Report 13 Delivering our strategy

Paying our suppliers In last year’s Annual Report we said that BT Group plc would This year the average number of days between invoice date and carry out a Board-level review of our human rights policy and supplier payment was 60 days (2013/14: 62 days). further develop our compliance framework. This review has now been completed. We assessed our operations in the UK against Suppliers can choose to use the BT Supplier Finance scheme. It offers stakeholder expectations on how businesses should respect human contracted suppliers the chance to be paid early, which reduces their rights. We have taken advice from both a leading law firm and a financing costs. We introduced it in September 2013 and it is now global, non-profit human rights consultancy. one of the largest supplier finance schemes in the UK, supporting over £1.2bn of spend annually. The review showed that we have strong processes to manage human rights impacts arising with our employees, such as highly developed You can find out more about the BT Supplier Finance scheme at diversity and wellbeing measures. We also have a clear approach www.selling2bt.bt.com/Payment/SupplierFinance/ to freedom of expression, based on our belief that our customers It is particularly attractive for SMEs (who make up around 50% should have the choice, whenever possible, to access the services of our supply base) and it supports UK Government initiatives to and content they want. The review did identify opportunities to encourage small business growth. We also follow the Better Payment strengthen our human rights policy and governance, and to be more Practice Code set up by the Government in partnership with business transparent about our operations and interactions with government. organisations across the UK. The BT Group plc Operating Committee and Board considered You can find out more about the Better Payment Practice Code at the recommendations and have approved an implementation www.payontime.co.uk programme to further enhance our approach to human rights. This programme will begin later in 2015. A human rights steering group Human rights has been established to achieve this. It is sponsored by the BT Group As a provider of communications services across the world, we could plc Operating Committee and will have broad representation across impact the human rights of our employees, workers in our supply our key functions and lines of business. More information can be chain, customers and communities in a number of different ways. found at www.bt.com/deliveringourpurpose Our statement of business practice, ‘The Way We Work’, sets out our commitment to respecting human rights. It gives employees, suppliers and anyone working on behalf of BT guidance on how we expect them to behave. We believe the areas that could be most affected by our business are the human rights to privacy and freedom of expression. Our policies on privacy, security, anti-corruption and bribery, diversity, inclusion, health, safety, wellbeing, conflict minerals and sourcing with human dignity help mitigate risks in these and other relevant areas.

802639 BT Group PLC.indb 13 5/19/2015 1:07:17 AM 14 BT plc Annual Report & Form 20-F 2015

Our relationship with HM Government The Communications Act and Ofcom We are the largest supplier of networked IT services to the UK public The Communications Act gives Ofcom legal powers and sets out sector. We work with more than 1,300 organisations across central, how electronic communication and broadcasting services should be local and devolved government, healthcare, police and defence regulated in the UK. It includes the conditions set by the European to provide some of the UK’s most vital services. For example, we directives. run N3, the National Health Service’s secure national network. We Ofcom’s main duties are: provide telecommunications services to the Ministry of Defence. And we have recently started working with the Welsh Government to • to further the interests of citizens in relation to communications operate the Wales-wide public sector broadband network and with matters; and Devon and Cornwall Police to provide their IT services. • to further the interests of consumers in relevant markets, where appropriate by promoting competition. We can be required by law to do certain things and provide certain services to Government. For example, under the Communications Under the powers of the Communications Act, Ofcom sets conditions Act, we (and others) can be required to provide or restore services that CPs must comply with. Some conditions, known as General during disasters. The Civil Contingencies Act 2004 also says that Conditions, apply to all CPs. These mainly deal with protecting the Government can impose obligations on us (and others) at times consumers’ general access and interconnection, planning for of emergency or in connection with civil contingency planning. The emergencies, providing information to Ofcom and allocating and Secretary of State can also require us to take certain actions in the transferring phone numbers. Other conditions apply to certain interests of national security and international relations. companies that are universal service providers or that Ofcom has decided have SMP in a particular market. Regulation In our markets in the UK and around the world, communications and We are the designated universal service provider for the UK (except TV services are regulated by governmental and non-governmental for the Hull area where it is KCOM Group) and so we have certain bodies. This is to make sure that CPs and broadcasters abide by obligations. The main one is to make sure that basic fixed-line common standards and rules, and that nobody is disadvantaged services are available at an affordable price to all consumers in the by those providers with strong positions in their markets. Below UK. We are also obliged to provide public payphones. we explain the regulatory framework and some of the recent and We have SMP in a number of markets including Business upcoming decisions taken by regulators and how they affect us. Connectivity (eg Ethernet, backhaul), Fixed Access (eg LLU, GEA, WLR) and Wholesale Narrowband (eg Call Origination). Ofcom’s European Union (EU) regulation market reviews are therefore very important for us. Following In EU countries, electronic communications networks and services a market review, if Ofcom decides that a CP has SMP, it can put are governed by directives and regulations set by the European controls in place, typically on the prices which the CP can charge. Commission (EC). These create a Europe-wide framework covering Ofcom will generally try to set charges that are reasonably based on services such as fixed and mobile voice, broadband, cable and costs and an appropriate return on the capital invested. satellite TV. Anyone can appeal against Ofcom’s decisions through a number of The directives include rules covering access and interconnection, routes, including to the Competition Appeal Tribunal (CAT) or to the universal service obligations and a requirement for national High Court. regulators to review markets for significant market power (SMP) every three years. Companies with SMP typically have a market share In March 2015, Ofcom announced a major review of the of 40% or more and are able to do things such as increase prices digital communications market. The Strategic Review of Digital without losing business to competitors (as would happen in a fully Communications will examine competition, investment, innovation competitive market). and the availability of products in the fixed-line, broadband and mobile markets. It will focus on three areas in particular: The directives also cover how regulators set price controls which can have a major impact on the companies subject to them. The • ensuring the right incentives for private-sector investment, rules require national regulators to consult with the EC on any price which can help deliver availability and quality of service; control decisions before they are finalised to make sure they are • maintaining strong competition and tackling obstacles or consistent with European regulations. bottlenecks that might be holding the sector back; and • identifying whether there is scope for deregulation in some areas. The EC announced its strategy for the Digital Single Market on 6 May 2015 which included a plan to review the EU The first phase of the review will examine current and future Telecommunications Framework. As part of this review, the EC aims market factors that may affect digital communications services, and to assess how to encourage investment in infrastructure and how to current regulatory approaches. To inform this work, Ofcom intends make current telecoms and media rules fit for new challenges and to engage with a wide range of stakeholders – including industry, new providers. The EC will also consider a European approach to consumer groups, the UK Government and devolved administrations spectrum management. – through meetings and workshops. This phase of the review is expected to conclude with a discussion document in summer 2015. UK regulation The telecoms and broadcasting industries are regulated primarily by BT’s Undertakings Ofcom (the UK’s independent regulator) within the framework set In response to Ofcom’s 2005 Strategic Review of by the various European directives, the Communications Act and Telecommunications, we gave some legally-binding undertakings other UK and EU regulations and recommendations. The telecoms under the Enterprise Act 2002. These Undertakings (which included sector is subject to an extensive ex-ante regulatory framework set the creation of Openreach) began in September 2005. They aim out under the European Common Regulatory Framework whereas to give clarity and certainty to the UK telecoms industry about the broadcasting and pay-TV is only subject to a mixture of separate, way we provide ‘upstream’ regulated products. This in turn supports specific regulation and general competition law. effective and fair competition in related ‘downstream’ markets.

802639 BT Group PLC.indb 14 5/19/2015 1:07:17 AM The Strategic Report 15 Delivering our strategy

Overseas regulation The degree of regulation in international markets varies widely. Ladder • Ladder pricing links the level of BT This can hinder our ability to compete. We are pressing incumbent pricing Wholesale’s termination charges for hosting operators around the world, and their national regulatory non-geographic numbers (such as 0800, authorities, for fairer, cost-related wholesale access to their 0845 numbers) to the retail call prices networks. charged by mobile network operators (MNOs) to their customers for calling such We are in discussions with both the EC and US regulatory authorities numbers. over what we believe to be premature deregulation of parts of the • Our ladder pricing policy was disputed by the US telecoms market. This has made it more difficult for non-US CPs MNOs. The CAT found in our favour in August to enter and compete in the US, while European telecoms markets 2011, but this was overturned by the Court remain open to competition from US operators. of Appeal in July 2012. • In July 2014 we won an appeal to the Impact of regulation Supreme Court that means that MNOs There were a number of regulatory decisions and outcomes of must pay BT outstanding charges for the appeals that affected us during the year and will impact us in the period starting prior to the CAT judgment in future. August 2011. BT has now reached financial settlements with all the MNOs. Fixed • In June 2014, Ofcom completed its reviews • We also raised ladder charges in relation to Access and of both the Fixed Access market (covering other number ranges which had also been Wholesale WLR, LLU, GEA, ISDN 2 and ISDN 30 disputed. These were heard at the CAT in Broadband products) and the Wholesale Broadband February 2015. BT and all the MNOs have Access Access (WBA) market (covering IPstream, now reached financial settlements in relation Market Datastream and WBC). to those charges. Reviews • Ofcom continued to impose charge controls on the markets where we have SMP. These Pay-TV • In June 2010, Sky appealed to the CAT controls cover the three years to March against Ofcom’s decision to regulate Sky 2017. Sports 1 and 2. • During this period, the artificially low price of • In August 2012, the CAT decided in Sky’s full LLU will be phased out to better reflect favour. We successfully appealed the CAT’s the actual costs of providing the service to decision and in February 2014, the Court of CPs. Appeal published its judgment that the CAT • Ofcom did not impose price regulation of must now reconsider the case. Sky requested wholesale fibre broadband (GEA). permission to appeal the Court of Appeal • For WBA, Ofcom enlarged the size of the judgment at the Supreme Court. area where competition is greater and where • This was rejected by the Supreme Court in we are free to set prices as we wish. October 2014. • In November 2014, the CAT ruled that Fibre • In May 2013, Ofcom opened an Sky must supply Sky Sports 1 and 2 to broadband investigation following a complaint which BT on IPTV on an interim basis until it has margin alleged that BT has abused its dominant concluded its review of the case. (Sky Sports position, such that the margin between the 1 and 2 continue to be provided on Digital prices BT Consumer charges for some of its Terrestrial TV.) fibre broadband products, and the wholesale • This allowed us to offer Sky Sports 1 and 2 to price charged by Openreach for the relevant our customers on our YouView set-top box. network inputs, is insufficient to allow other • In March, the CAT held a hearing about CPs to compete profitably. which panel should hear the case. In May, • In October 2014, Ofcom closed the the chairman of the panel decided to recuse investigation having found no grounds for himself from hearing the appeal, and a new taking any action. chair will need to be appointed. The CAT • Separately in June 2014, Ofcom consulted will also need to determine the process for on proposals for an ex-ante margin squeeze reconsidering the case, as required by the test. Ofcom issued its final statement in Court of Appeal. March 2015. Ofcom’s indicative assessment • In November 2014, following a complaint by was that we were likely to be making a Virgin Media, Ofcom opened an investigation sufficient margin to pass the test. under the Competition Act 1998 and the • We are required to submit to Ofcom a Treaty on the Functioning of the European formal margin test report demonstrating Union into the joint-selling arrangements compliance before the end of May 2015 and of live UK broadcast rights for FA Premier then every six months. League football matches. • We believe the design of the test is flawed • Ofcom has consulted interested parties, and are considering our options, including including BT, and is currently in an an appeal. information-gathering stage.

802639 BT Group PLC.indb 15 5/19/2015 1:07:17 AM 16 BT plc Annual Report & Form 20-F 2015

Water usage Ethernet • In December 2012, Ofcom issued final Most of the water we use is used in washrooms and catering facilities dispute determinations on disputes over historic at our offices. We also use water to cool equipment at our offices appeal Ethernet pricing. Ofcom concluded that and telephone exchanges. This year we began a programme to between April 2006 and March 2011 the install water meters at sites that together account for half of our prices we set for certain Ethernet services total water use in the UK. The new meters provide half-hourly water were too high, resulting in an overcharge of measurements, giving us a more accurate understanding of how £151m over this period. We disagree with we use water and helping us spot leaks more quickly. This will help the determinations and both BT and the us identify where we can save water and we estimate this alone will affected CPs appealed various points to the help us cut our water use by 2% in 2015/16. CAT. • In August 2014 the CAT handed down its Energy use and carbon footprint judgment that rejected BT’s appeal against BT TSO is responsible for managing the group’s energy consumption the amount of the overcharge and judged and for putting strategies in place to cut our carbon footprint. that BT should also pay interest on this We have signed long-term Power Purchase Agreements with wind amount. This matter has been referred to and solar farms. These will provide 16% of our electricity needs in Ofcom. Great Britain from next year. One contract connects a large solar • We disagree with the CAT’s judgment and farm to our R&D facility at Adastral Park. We believe this is the have applied for permission to appeal to the largest arrangement of its kind in the UK and will provide up to 75% Court of Appeal. of the electricity needed by the Park on sunny days. Business • During the year Ofcom began its In Great Britain we spent around £306m on energy and fuel this Connectivity pre-consultation process ahead of reviewing year (2013/14: £296m), the increase from last year reflects higher Market the business connectivity markets and the energy prices. We estimate our energy savings programme delivered Review associated leased line charge control. a 3.2% reduction in consumption and is expected to generate • We expect the first round of consultations over £36m in annualised cost savings. This is the sixth consecutive in spring 2015 with the new regulations year that we have achieved a reduction and takes the total savings applying from April 2016. calculated on this basis to £168m. • Ofcom’s review will consider, amongst other To track our carbon emissions, we report two C0 equivalent (C0 e) things, the merits of introducing a new 2 2 intensity measures: passive dark fibre remedy as well as the scope for further deregulation, reflecting an • Since 2008, we have had an ambitious carbon emissions increasingly competitive market. reduction target linked to our economic contribution to GDP. This year we reduced our worldwide net carbon emissions per unit of Wholesale • In April 2015, Ofcom issued a ‘call for value added (our contribution to GDP) by 79% compared with Narrowband inputs’, being the first stage in its eviewr 1996/97. Market of the wholesale fixed call origination, • To help benchmark our performance against other organisations, Review termination and interconnection markets. we also report our intensity as net emissions (scopes 1 & 2) per • The review will consider whether regulation unit of revenue. Our figure of 13.6 tonnes C02e per £ million of of call origination is still appropriate, and revenue reflects an 84% reduction since 1996/97. whether further charge controls are required when the current controls end in September We report all of the greenhouse gas (GHG) emission sources required 2016. under UK regulations. We have used the GHG Protocol Corporate Accounting and Reporting Standard with UK Government GHG Conversion Factors for Company Reporting 2014 and International Natural resources Energy Agency Conversion Factors. The table below reports our As well as trying to minimise our use of precious natural resources, GHG emissions and defines scopes 1, 2 and 3. We reduced our total

we are also maintaining our focus on reducing our waste. worldwide net CO2e emissions by 1.4% this year.

We try to reduce the amount of materials we use in our operations, a Carbon emissions from our operations CO2e (KTonnes) and to reuse them rather than dispose of them. Many of our waste Gross emissions 1997 materials can be turned into resources and redirected back into the (excludes third-party consumption) (base) 2015 2014 2013 2012 supply chain. Scopes 1–3 1,628 1,448 1,387 1,445 1,528 Net emissions Kt We use a number of specialist contractors to recycle materials (excludes third-party consumption) that we cannot reuse. These include cables, network equipment, Combustion of fuel and wood and other mixed recycling such as paper and cardboard. operation of facilities For hazardous waste materials such as batteries, fluorescent light (Scope 1) 414 178 182 194 191 tubes and oil, we use specialist contractors who make sure the Electricity purchased for waste is recycled and managed according to legislation. We have own use (Scope 2) 1,097 65 62 190 516 around 2,000 sites which each produce more than 500kg of hazardous waste a year. They are registered with the appropriate UK Other indirect emissions environmental authority. (Scope 3) 117 142 147 151 157 a We have restated our worldwide energy consumption and GHG emissions figures for previous years following improvements to our data. Previous estimates of energy usage have been updated with measured figures.

802639 BT Group PLC.indb 16 5/19/2015 1:07:17 AM The Strategic Report 17 Delivering our strategy

Our risks How we manage risk Like all businesses, we are affected by a number of risks and We need to manage risk so we can meet our objectives, build uncertainties. These may be impacted by internal and external shareholder value for BT and promote our stakeholders’ interests. factors, some of which we cannot control. Many of our risks are We have a group-wide risk management process. The four stages of similar to those felt by comparable companies in terms of scale and this are: identification; evaluation; response; and monitoring. operation. Changes over the year Principal risks and uncertainties In 2013/14 we improved the way we manage risk through In this section we explain some of the principal risks and enhancing our risk management training, formalising the linkage uncertainties affecting us. These risks have the potential to impact between our investments and our principal risks and proactively our business, brand, people, assets, revenue, profits, liquidity or assessing emerging risks. This year we made further improvements capital resources. The principal risks we described last year have including: evolved, and so too has our response to them. Project and programme risk management BT’s Enterprise Risk Management framework provides reasonable We developed an enhanced risk management policy, process and (but cannot give absolute) assurance that significant risks are toolkit to provide guidance to colleagues managing risk in projects identified and addressed. There may be some risks which are and programmes. This was supported by additional training for our unknown to us at present. And there may be some that we consider project management community. less significant now but become more important later. External factors can present both risks and opportunities, to our Risk appetite business and to others. We focus our efforts on predicting and Risk appetite (the nature and extent of the risks we are prepared mitigating the risks, while at the same time seeking to capitalise on to take) has been reviewed by both the BT Group plc Board and opportunities that may emerge. the Operating Committee this year. We have also progressed this work in our lines of business, for example using risk appetite to help We recognise the particular uncertainty that political and geo- determine the relative criticality of different IT systems. political risks present, both in the UK (for example the Scottish independence referendum in 2014) and globally. We now monitor Risk culture these through a separate sub-committee of BT’s Risk Panel. Aligning with our organisational health programme, we have identified opportunities to build into the behaviours being In the principal risks section below, we talk about what we are doing embedded into our business, a culture that positively supports active to stop our main risks materialising, or to limit their impact. Our and open risk management. principal risks and uncertainties should be considered along with the risk management process, the forward-looking statements in this document and the cautionary statement regarding forward-looking statements, which you can read on page 129.

802639 BT Group PLC.indb 17 5/19/2015 1:07:17 AM 18 BT plc Annual Report & Form 20-F 2015

Our principal risks

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Security and resilience

The resilience of our IT systems, networks and associated A breach of our security, or compromise of data or resilience • Deliver superior In the past year we have had to deal with an unprecedented increase in We manage the risk of service interruption through a robust control infrastructure, including our core data centres and exchanges, affecting our operations, or those of our customers, could customer service the volume and intensity of cyber-attacks. We recorded more top priority framework that focuses first and foremost on prevention, supported by is essential to our short and long-term commercial success. lead to an extended interruption to our services or even incidents in the last three months of 2014 than were experienced in the tried-and-tested recovery capabilities. We have also undertaken a large- affect national infrastructure. The impact of such a failure previous two years. The attacks were aimed not just at BT, but also at our scale estate resilience programme during the year, through which we have We face a variety of hazards that could cause significant could include: immediate financial losses due to fraud and customers, with the potential to disrupt others and cause collateral damage continued to invest in developing our resilience and recovery capabilities in interruptions to the delivery of our services. These include theft; termination of contracts; immediate loss of revenue to BT services. instances where the risk has been shown to exceed acceptable levels for us. component failure, physical attack, theft of copper cable and where orders and invoices cannot be processed; contractual We have a rolling programme of major incident simulations to test and refine equipment, fire, explosion, flood, power failure, overheating penalties; lost productivity and unplanned costs of restoration Following a comprehensive review of the resilience and disaster recovery our crisis management procedures. An intensive focus on controlling the or extreme cold, problems encountered during upgrades and and improvement; prosecution; and fines. capability of our critical systems, databases and exchanges, we have volume of network changes has also reduced the number of incidents. major changes, and the failure of key suppliers. A cyber-security invested in enhancing site resilience based on our target levels of acceptable incident or logical attack could also trigger service interruption. Additionally, reputational damage may arise, undermining risk. We have also invested significantly in geo-resilience (ie cross-site The replacement of equipment that is approaching the end of its service life market confidence and jeopardising future revenues. recovery) for our critical systems where this did not previously exist, and has provided opportunities to invest in new, more resilient facilities. We also We also have a responsibility to many millions of customers, Ultimately the welfare of individuals might be put at risk have already seen a return on this investment through seamless failover and benefit from having geographically-distributed locations that support cross- both business and consumer, to ensure their electronic where services cannot be provided or personal data is continuity of service during planned and, occasionally, unplanned outages. site recovery, avoiding the need to invest in new sites just for this purpose. information remains confidential, accurate, secure and available. misappropriated. The same holds true for our own data, information and Our security strategy aims to prevent, deter and minimise the consequences intellectual property. of attacks. Our defences include physical protection of our assets, encryption of data, control of access rights, real-time analysis and sharing of intelligence, and continuous monitoring for intrusion, modifications and anomalies. We can rapidly adjust firewalls to automatically block most malicious data traffic. These measures combine to reduce the likelihood of a major incident and help ensure that interruption or damage can be contained and dealt with promptly and effectively. In response to the increased cyber threat, we have strengthened our defences, invested in new tools, techniques and skills to monitor threats, and increased our capacity to deal with attacks. We have also started a major programme to restructure our IT estate to make it quicker and easier to manage the incidents when they occur.

Major contracts

We have a number of complex and high-value national and Failure to manage and meet our commitments under these • Deliver superior Tough market conditions and competitive pressures continue in many Our group-wide risk governance and reporting, along with line of business multinational customer contracts. contracts, as well as changes in customers’ requirements, customer service global regions while in some we are experiencing higher growth in volume local governance and risk management processes, provide the visibility of their budgets, strategies or businesses, may lead to a • Transform our costs of business due to previous investments we have made. The risk landscape key risk and mitigation activities. Assurance is provided via independent The revenue arising from, and the profitability of, these reduction in our expected future revenue, profitability and • Invest for growth changes accordingly, as does our focus of risk support and review. audits and at an individual contract level through an independent contracts are subject to a number of factors including: variation cash generation. Unexpectedly high costs associated with the review programme based on multiple selection criteria or by senior in cost; achievement of cost reductions anticipated in the delivery of particular transformational contracts could also Of particular note this year has been the number of broadband contracts management request. Progress on risks and mitigation actions agreed at contract pricing, both in terms of scale and time; delays in the negatively impact profitability. with local authorities through the BDUK programme now entering the these independent reviews are monitored and reported to relevant senior delivery or achievement of agreed milestones owing to factors delivery phase of the contract lifecycle. While these contracts carry a managers to ensure progress can be tracked. A separate, dedicated team either within or outside of our control; changes in customers’ Earnings may be reduced or contracts may even become different risk profile, we apply our established risk governance and reporting provides assurance over our BDUK programme. requirements, their budgets, strategies or businesses; and the loss-making through loss of revenue, changes to customers’ processes to ensure that risks and mitigation activities are identified and performance of our suppliers. Any of these factors could make a businesses, business failure or contract termination. reported to management. We have skills development programmes to enhance the ability of our contract less profitable or even loss-making. Failure to replace the revenue and earnings lost from these people to identify and manage risk and to make sure learning from previous customers could lead to an overall reduction in group revenue, experience is included in training materials. The scope and availability of The degree of risk generally varies with the scope and life of profitability and cash flow. training opportunities continue to grow in line with BT-wide learning and the contract and is typically higher in the early stages of the development initiatives. contract. Some customer contracts require investment in the early stages, which is expected to be recovered over the life of the contract. Major contracts often involve the implementation of new systems and communications networks, transformation of legacy networks and the development of new technologies. The recoverability of these upfront costs may be impacted by delays or failure to meet milestones. Substantial performance risk exists in some of these highly complex contracts.

Trend indicates management’s perception of how the Pre-mitigation risk is Pre-mitigation risk Pre-mitigation risk is pre-mitigation risk has moved year on year increasing/worsening is at a similar level lessening/improving

802639 BT Group PLC.indb 18 5/19/2015 1:07:18 AM The Strategic Report 19 Delivering our strategy

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Security and resilience

The resilience of our IT systems, networks and associated A breach of our security, or compromise of data or resilience • Deliver superior In the past year we have had to deal with an unprecedented increase in We manage the risk of service interruption through a robust control infrastructure, including our core data centres and exchanges, affecting our operations, or those of our customers, could customer service the volume and intensity of cyber-attacks. We recorded more top priority framework that focuses first and foremost on prevention, supported by is essential to our short and long-term commercial success. lead to an extended interruption to our services or even incidents in the last three months of 2014 than were experienced in the tried-and-tested recovery capabilities. We have also undertaken a large- affect national infrastructure. The impact of such a failure previous two years. The attacks were aimed not just at BT, but also at our scale estate resilience programme during the year, through which we have We face a variety of hazards that could cause significant could include: immediate financial losses due to fraud and customers, with the potential to disrupt others and cause collateral damage continued to invest in developing our resilience and recovery capabilities in interruptions to the delivery of our services. These include theft; termination of contracts; immediate loss of revenue to BT services. instances where the risk has been shown to exceed acceptable levels for us. component failure, physical attack, theft of copper cable and where orders and invoices cannot be processed; contractual We have a rolling programme of major incident simulations to test and refine equipment, fire, explosion, flood, power failure, overheating penalties; lost productivity and unplanned costs of restoration Following a comprehensive review of the resilience and disaster recovery our crisis management procedures. An intensive focus on controlling the or extreme cold, problems encountered during upgrades and and improvement; prosecution; and fines. capability of our critical systems, databases and exchanges, we have volume of network changes has also reduced the number of incidents. major changes, and the failure of key suppliers. A cyber-security invested in enhancing site resilience based on our target levels of acceptable incident or logical attack could also trigger service interruption. Additionally, reputational damage may arise, undermining risk. We have also invested significantly in geo-resilience (ie cross-site The replacement of equipment that is approaching the end of its service life market confidence and jeopardising future revenues. recovery) for our critical systems where this did not previously exist, and has provided opportunities to invest in new, more resilient facilities. We also We also have a responsibility to many millions of customers, Ultimately the welfare of individuals might be put at risk have already seen a return on this investment through seamless failover and benefit from having geographically-distributed locations that support cross- both business and consumer, to ensure their electronic where services cannot be provided or personal data is continuity of service during planned and, occasionally, unplanned outages. site recovery, avoiding the need to invest in new sites just for this purpose. information remains confidential, accurate, secure and available. misappropriated. The same holds true for our own data, information and Our security strategy aims to prevent, deter and minimise the consequences intellectual property. of attacks. Our defences include physical protection of our assets, encryption of data, control of access rights, real-time analysis and sharing of intelligence, and continuous monitoring for intrusion, modifications and anomalies. We can rapidly adjust firewalls to automatically block most malicious data traffic. These measures combine to reduce the likelihood of a major incident and help ensure that interruption or damage can be contained and dealt with promptly and effectively. In response to the increased cyber threat, we have strengthened our defences, invested in new tools, techniques and skills to monitor threats, and increased our capacity to deal with attacks. We have also started a major programme to restructure our IT estate to make it quicker and easier to manage the incidents when they occur.

Major contracts

We have a number of complex and high-value national and Failure to manage and meet our commitments under these • Deliver superior Tough market conditions and competitive pressures continue in many Our group-wide risk governance and reporting, along with line of business multinational customer contracts. contracts, as well as changes in customers’ requirements, customer service global regions while in some we are experiencing higher growth in volume local governance and risk management processes, provide the visibility of their budgets, strategies or businesses, may lead to a • Transform our costs of business due to previous investments we have made. The risk landscape key risk and mitigation activities. Assurance is provided via independent The revenue arising from, and the profitability of, these reduction in our expected future revenue, profitability and • Invest for growth changes accordingly, as does our focus of risk support and review. audits and at an individual contract level through an independent contracts are subject to a number of factors including: variation cash generation. Unexpectedly high costs associated with the review programme based on multiple selection criteria or by senior in cost; achievement of cost reductions anticipated in the delivery of particular transformational contracts could also Of particular note this year has been the number of broadband contracts management request. Progress on risks and mitigation actions agreed at contract pricing, both in terms of scale and time; delays in the negatively impact profitability. with local authorities through the BDUK programme now entering the these independent reviews are monitored and reported to relevant senior delivery or achievement of agreed milestones owing to factors delivery phase of the contract lifecycle. While these contracts carry a managers to ensure progress can be tracked. A separate, dedicated team either within or outside of our control; changes in customers’ Earnings may be reduced or contracts may even become different risk profile, we apply our established risk governance and reporting provides assurance over our BDUK programme. requirements, their budgets, strategies or businesses; and the loss-making through loss of revenue, changes to customers’ processes to ensure that risks and mitigation activities are identified and performance of our suppliers. Any of these factors could make a businesses, business failure or contract termination. reported to management. We have skills development programmes to enhance the ability of our contract less profitable or even loss-making. Failure to replace the revenue and earnings lost from these people to identify and manage risk and to make sure learning from previous customers could lead to an overall reduction in group revenue, experience is included in training materials. The scope and availability of The degree of risk generally varies with the scope and life of profitability and cash flow. training opportunities continue to grow in line with BT-wide learning and the contract and is typically higher in the early stages of the development initiatives. contract. Some customer contracts require investment in the early stages, which is expected to be recovered over the life of the contract. Major contracts often involve the implementation of new systems and communications networks, transformation of legacy networks and the development of new technologies. The recoverability of these upfront costs may be impacted by delays or failure to meet milestones. Substantial performance risk exists in some of these highly complex contracts.

802639 BT Group PLC.indb 19 5/19/2015 1:07:18 AM 20 BT plc Annual Report & Form 20-F 2015

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Pensions

We have a significant funding obligation in relation to our The next valuation of the BTPS is scheduled to take place as at • Transform our costs The actuarial valuation of the Scheme as at 30 June 2014 was announced The investment performance and liability experience, as well as the defined benefit pension scheme in the UK, the BT Pension 30 June 2017 and an increase in the pension deficit may have on 30 January 2015. This has provided certainty over the level of cash associated risks and any mitigation, are regularly reviewed and monitored Scheme (BTPS or Scheme). an impact on the level of deficit payments we are required to contributions required until the next triennial valuation is concluded. by both us and the BTPS Trustee. The BTPS has a well-diversified investment make into the Scheme. Indirectly it may also have an adverse strategy, which reduces the impact of adverse movements in the value of The BTPS faces similar risks to other defined benefit schemes. impact on BT Group plc’s share price and our credit rating. When a valuation is calculated, the funding position is affected by the individual asset classes and helps ensure that an efficient balance of risk and Future low investment returns, lower interest rates, high financial market conditions at the valuation date. When determining return is maintained. inflation, longer life expectancy and regulatory changes may Any deterioration in our credit rating would increase our cost expected future returns on the Scheme assets, different factors are taken all result in the cost of funding the BTPS becoming a more of borrowing and may limit the availability or flexibility of into account, including yields (or returns) on government bonds, which Our financial strength and cash generation provide a level of protection significant burden on our financial resources. future funding for the group, thereby affecting our ability to have fallen significantly since 30 June 2014. If a lower investment return against future variations in the funding position of the BTPS. The funding invest, pay dividends or repay debt as it matures. assumption is adopted at the 30 June 2017 valuation, the liabilities would liabilities also include some buffer against future negative experience, as likely increase, potentially leading to a higher level of deficit payments. legislation requires that liabilities are calculated on a prudent basis. The BTPS entered into longevity insurance and reinsurance arrangements on 4 July 2014 to help protect the Scheme against costs associated with potential increases in life expectancy. These arrangements covered approximately 25% of the Scheme’s total exposure to increases in longevity. On 16 July 2014 the Court of Appeal handed down its judgment on the scope and extent of the Crown Guarantee, which was granted by the Government on BT’s privatisation. This judgment has provided welcome clarity although the Crown Guarantee is not taken into account for the purposes of the actuarial valuation of the Scheme and is an entirely separate matter, only being relevant in the highly unlikely event that BT became insolvent.

Growth in a competitive market

We operate in markets which are characterised by: high levels Failure to achieve sustainable profitable revenue growth could • Invest for growth The UK economy grew by 3% in 2014. However customers are cautious Our mitigation of this risk centres on successfully executing our strategy. of change; strong and new competition; declining prices and, erode our competitive position and reduce our profitability, with their spending. Price and value for money remain the main decision We believe that delivering this strategy, with its focus on broadening and in some markets, declining revenues; technology substitution; cash flow and ability to invest for the future. drivers for many consumers and small businesses. At a global level, deepening our customer relationships, delivering superior customer service, market and product convergence; customer churn; and continuing economic uncertainty remains a factor causing corporate transforming our costs and investing for growth, will together help us deliver regulatory intervention to promote competition and reduce customers to delay or downscale infrastructure upgrades and significant sustainable, profitable revenue growth. We are investing in our business, wholesale prices. investment decisions. in areas such as fibre, TV/content, voice/mobility, UK business markets and through our focus on global companies. Our extensive cost transformation Competition in our markets is strong. In the UK, new providers of fibre to the programmes continue to deliver savings and will support profitability trends. premises are entering the fibre access market, offering alternatives to the We also believe we can mitigate this risk by seeking changes in regulation to Virgin Media and Openreach networks. In the TV and content markets, TV level the playing field so that we can compete effectively in adjacent markets viewing habits are changing with the increasing use of on-demand viewing for the benefit of our customers. via over-the-top content services providers. Fixed-mobile convergence is a trend visible in many Continental European countries and increasingly in UK markets. A number of providers are competing in this space. BT Group plc’s proposed acquisition of EE may stimulate other operators to react to fixed-mobile convergence provided the UK market develops in this way.

802639 BT Group PLC.indb 20 5/19/2015 1:07:18 AM The Strategic Report 21 Delivering our strategy

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Pensions

We have a significant funding obligation in relation to our The next valuation of the BTPS is scheduled to take place as at • Transform our costs The actuarial valuation of the Scheme as at 30 June 2014 was announced The investment performance and liability experience, as well as the defined benefit pension scheme in the UK, the BT Pension 30 June 2017 and an increase in the pension deficit may have on 30 January 2015. This has provided certainty over the level of cash associated risks and any mitigation, are regularly reviewed and monitored Scheme (BTPS or Scheme). an impact on the level of deficit payments we are required to contributions required until the next triennial valuation is concluded. by both us and the BTPS Trustee. The BTPS has a well-diversified investment make into the Scheme. Indirectly it may also have an adverse strategy, which reduces the impact of adverse movements in the value of The BTPS faces similar risks to other defined benefit schemes. impact on BT Group plc’s share price and our credit rating. When a valuation is calculated, the funding position is affected by the individual asset classes and helps ensure that an efficient balance of risk and Future low investment returns, lower interest rates, high financial market conditions at the valuation date. When determining return is maintained. inflation, longer life expectancy and regulatory changes may Any deterioration in our credit rating would increase our cost expected future returns on the Scheme assets, different factors are taken all result in the cost of funding the BTPS becoming a more of borrowing and may limit the availability or flexibility of into account, including yields (or returns) on government bonds, which Our financial strength and cash generation provide a level of protection significant burden on our financial resources. future funding for the group, thereby affecting our ability to have fallen significantly since 30 June 2014. If a lower investment return against future variations in the funding position of the BTPS. The funding invest, pay dividends or repay debt as it matures. assumption is adopted at the 30 June 2017 valuation, the liabilities would liabilities also include some buffer againstfuture negative experience, as likely increase, potentially leading to a higher level of deficit payments. legislation requires that liabilities are calculated on a prudent basis. The BTPS entered into longevity insurance and reinsurance arrangements on 4 July 2014 to help protect the Scheme against costs associated with potential increases in life expectancy. These arrangements covered approximately 25% of the Scheme’s total exposure to increases in longevity. On 16 July 2014 the Court of Appeal handed down its judgment on the scope and extent of the Crown Guarantee, which was granted by the Government on BT’s privatisation. This judgment has provided welcome clarity although the Crown Guarantee is not taken into account for the purposes of the actuarial valuation of the Scheme and is an entirely separate matter, only being relevant in the highly unlikely event that BT became insolvent.

Growth in a competitive market

We operate in markets which are characterised by: high levels Failure to achieve sustainable profitable revenue growth could • Invest for growth The UK economy grew by 3% in 2014. However customers are cautious Our mitigation of this risk centres on successfully executing our strategy. of change; strong and new competition; declining prices and, erode our competitive position and reduce our profitability, with their spending. Price and value for money remain the main decision We believe that delivering this strategy, with its focus on broadening and in some markets, declining revenues; technology substitution; cash flow and ability to invest for the future. drivers for many consumers and small businesses. At a global level, deepening our customer relationships, delivering superior customer service, market and product convergence; customer churn; and continuing economic uncertainty remains a factor causing corporate transforming our costs and investing for growth, will together help us deliver regulatory intervention to promote competition and reduce customers to delay or downscale infrastructure upgrades and significant sustainable, profitable revenue growth. We are investing in our business, wholesale prices. investment decisions. in areas such as fibre, TV/content, voice/mobility, UK business markets and through our focus on global companies. Our extensive cost transformation Competition in our markets is strong. In the UK, new providers of fibre to the programmes continue to deliver savings and will support profitability trends. premises are entering the fibre access market, offering alternatives to the We also believe we can mitigate this risk by seeking changes in regulation to Virgin Media and Openreach networks. In the TV and content markets, TV level the playing field so that we can compete effectively in adjacent markets viewing habits are changing with the increasing use of on-demand viewing for the benefit of our customers. via over-the-top content services providers. Fixed-mobile convergence is a trend visible in many Continental European countries and increasingly in UK markets. A number of providers are competing in this space. BT Group plc’s proposed acquisition of EE may stimulate other operators to react to fixed-mobile convergence provided the UK market develops in this way.

802639 BT Group PLC.indb 21 5/19/2015 1:07:18 AM 22 BT plc Annual Report & Form 20-F 2015

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Communications industry regulation

Regulation impacts our activities across all jurisdictions. Regulatory requirements and constraints can directly impact • Deliver superior Over the last year, we have seen regulatory activity in a number of areas We have a team of regulatory specialists (including economists and our ability to compete effectively and earn revenues. customer service which are summarised in Regulation on page 14. accountants) who, together with legal experts and external advisers, In the UK, Ofcom can require us to provide specific wholesale • Transform our costs continuously monitor and review the scope for changes in the regulatory services on specified terms following market reviews. The Regulatory impacts are highest in the UK where BT is subject rule set and potential disputes with other CPs. This team maintains an scope and form of that regulation is reviewed every three years to direct regulation in a number of areas following periodic ongoing dialogue with regulators and other key influencers to understand and can include controls on the level of prices we can charge market reviews. Based on the latest Regulatory Financial the regulatory outlook and to ensure our positions are understood. We push for regulated inputs. It has powers to investigate and enforce Statements for 2013/14, around £5.2bn of our revenue (of for fair, proportionate, consistent and evidenced-based regulation across the regulatory rules in place and can impose fines on us for which £2.8bn is to downstream parts of BT) is from wholesale markets and jurisdictions. We actively engage in supplying evidence and non-compliance. Ofcom also has powers to regulate the terms markets where we have been found to have Significant Market analysis for all market reviews, charge controls and disputes/investigations on which we are supplied with certain services – for instance, Power following market reviews. Most of these revenues are to manage the risks arising from specific decisions in any given year. mobile call termination and wholesale access to certain pay-TV subject to charge controls which require us to reduce our channels – and this impacts our costs and the scope of services prices annually by a defined percentage in real terms. Controls We are also able to appeal any regulatory decisions where we believe errors we are able to provide to our customers. Ofcom can also resolve are usually set for three years and will constrain revenues have been made. We will also raise disputes and complaints under the disputes between BT and other communications providers during that period. relevant regulatory framework or competition law where we face problems about the terms on which services are supplied. gaining access to wholesale services – such as access to other networks or to When other CPs ask Ofcom to resolve disputes with us, there wholesale pay-TV channels. Outside the UK, general licensing requirements can restrict the is a risk that Ofcom may set the prices at which services must extent to which we can enter markets and compete. Regulation be supplied and/or require us to provide specific services. In will also define the terms on which we can purchase key certain circumstances, Ofcom can adjust historic prices and wholesale services from others. require us to make repayments to CPs. Regulation outside the UK can impact (i) our revenue, by limiting our ability to compete through overly-restrictive licensing requirements or ineffective regulation of access to other networks and (ii) our costs, by defining and controlling the terms of access to necessary regulated inputs.

Business integrity and ethics

We are committed to maintaining high standards of ethical Failure by our employees, or associated persons such as • Deliver superior The importance of conducting business ethically is becoming increasingly We have a number of controls in place to address risk in this area. These behaviour, and have a zero tolerance approach to bribery and suppliers or agents to comply with anti-corruption and customer service recognised across the globe as more countries pass anti-corruption and include a comprehensive anti-corruption and bribery programme, and ‘The corruption. bribery and sanctions legislation could result in substantial • Transform our costs bribery legislation. In the UK, deferred prosecution agreements are available Way We Work’, which is our statement of business practice and which is penalties, criminal prosecution and significant damage to our to the UK Serious Fraud Office for fraud, bribery and other economic available in 14 languages. We ask all BT employees to sign up to its principles We have to comply with a wide range of local and international reputation. This could in turn impact our future revenue and crime. In terms of enforcement, there are yet to be any significant cases and our anti-corruption and bribery policy. We have specific policies anti-corruption and bribery laws. In particular the UK cash flow, the extent of which would depend on the nature resulting from the UK Bribery Act, but there continue to be many significant covering gifts and hospitality and charitable donations and sponsorship. We Bribery Act and US Foreign and Corrupt Practices Act (FCPA) of the breach, the legislation concerned and any associated enforcement actions brought under the FCPA. run a training programme with a particular focus on roles such as those in provide comprehensive anti-bribery legislation. Both have penalties. Allegations of corruption or bribery or violation of procurement and sales. extraterritorial reach and so cover our global operations. As sanctions regulations could also lead to reputation and brand we expand globally, we are increasingly operating in countries damage with investors, regulators and customers. We regularly assess our business integrity risks to make sure that the identified as having a higher risk of bribery and corruption. We appropriate mitigation is in place. ‘Speak Up’ is our confidential hotline, also have to ensure compliance with trade sanctions, and import which is operated by an external third party with all reports passed to the and export controls. Director of Ethics and Compliance for review and investigation. Our internal audit team regularly runs checks on our business. We also use external providers to carry out assessments in areas we believe to be higher risk, to ensure our policies are understood and the controls are functioning. We selectively conduct due diligence checks on third parties including suppliers, agents, resellers and distributors. Our procurement contracts include anti- corruption and bribery clauses. We have implemented a policy to adhere to applicable sanctions and export control laws. The policy requires approval on all contract bids involving a country where sanctions are imposed by the EU or the US. The policy also mandates that our internal shipping system is used to arrange all international exports. The system conducts compliance checks and flags any orders which require an export licence.

02b_802639_Report of the Directors_Strategy_p14-28.indd 22 5/28/2015 10:19:29 AM The Strategic Report 23 Delivering our strategy

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Communications industry regulation

Regulation impacts our activities across all jurisdictions. Regulatory requirements and constraints can directly impact • Deliver superior Over the last year, we have seen regulatory activity in a number of areas We have a team of regulatory specialists (including economists and our ability to compete effectively and earn revenues. customer service which are summarised in Regulation on page 14. accountants) who, together with legal experts and external advisers, In the UK, Ofcom can require us to provide specific wholesale • Transform our costs continuously monitor and review the scope for changes in the regulatory services on specified terms following market reviews. The Regulatory impacts are highest in the UK where BT is subject rule set and potential disputes with other CPs. This team maintains an scope and form of that regulation is reviewed every three years to direct regulation in a number of areas following periodic ongoing dialogue with regulators and other key influencers to understand and can include controls on the level of prices we can charge market reviews. Based on the latest Regulatory Financial the regulatory outlook and to ensure our positions are understood. We push for regulated inputs. It has powers to investigate and enforce Statements for 2013/14, around £5.2bn of our revenue (of for fair, proportionate, consistent and evidenced-based regulation across the regulatory rules in place and can impose fines on us for which £2.8bn is to downstream parts of BT) is from wholesale markets and jurisdictions. We actively engage in supplying evidence and non-compliance. Ofcom also has powers to regulate the terms markets where we have been found to have Significant Market analysis for all market reviews, charge controls and disputes/investigations on which we are supplied with certain services – for instance, Power following market reviews. Most of these revenues are to manage the risks arising from specific decisions in any given year. mobile call termination and wholesale access to certain pay-TV subject to charge controls which require us to reduce our channels – and this impacts our costs and the scope of services prices annually by a defined percentage in real terms. Controls We are also able to appeal any regulatory decisions where we believe errors we are able to provide to our customers. Ofcom can also resolve are usually set for three years and will constrain revenues have been made. We will also raise disputes and complaints under the disputes between BT and other communications providers during that period. relevant regulatory framework or competition law where we face problems about the terms on which services are supplied. gaining access to wholesale services – such as access to other networks or to When other CPs ask Ofcom to resolve disputes with us, there wholesale pay-TV channels. Outside the UK, general licensing requirements can restrict the is a risk that Ofcom may set the prices at which services must extent to which we can enter markets and compete. Regulation be supplied and/or require us to provide specific services. In will also define the terms on which we can purchase key certain circumstances, Ofcom can adjust historic prices and wholesale services from others. require us to make repayments to CPs. Regulation outside the UK can impact (i) our revenue, by limiting our ability to compete through overly-restrictive licensing requirements or ineffective regulation of access to other networks and (ii) our costs, by defining and controlling the terms of access to necessary regulated inputs.

Business integrity and ethics

We are committed to maintaining high standards of ethical Failure by our employees, or associated persons such as • Deliver superior The importance of conducting business ethically is becoming increasingly We have a number of controls in place to address risk in this area. These behaviour, and have a zero tolerance approach to bribery and suppliers or agents to comply with anti-corruption and customer service recognised across the globe as more countries pass anti-corruption and include a comprehensive anti-corruption and bribery programme, and ‘The corruption. bribery and sanctions legislation could result in substantial • Transform our costs bribery legislation. In the UK, deferred prosecution agreements are available Way We Work’, which is our statement of business practice and which is penalties, criminal prosecution and significant damage to our to the UK Serious Fraud Office for fraud, bribery and other economic available in 14 languages. We ask all BT employees to sign up to its principles We have to comply with a wide range of local and international reputation. This could in turn impact our future revenue and crime. In terms of enforcement, there are yet to be any significant cases and our anti-corruption and bribery policy. We have specific policies anti-corruption and bribery laws. In particular the UK cash flow, the extent of which would depend on the nature resulting from the UK Bribery Act, but there continue to be many significant covering gifts and hospitality and charitable donations and sponsorship. We Bribery Act and US Foreign and Corrupt Practices Act (FCPA) of the breach, the legislation concerned and any associated enforcement actions brought under the FCPA. run a training programme with a particular focus on roles such as those in provide comprehensive anti-bribery legislation. Both have penalties. Allegations of corruption or bribery or violation of procurement and sales. extraterritorial reach and so cover our global operations. As sanctions regulations could also lead to reputation and brand we expand globally, we are increasingly operating in countries damage with investors, regulators and customers. We regularly assess our business integrity risks to make sure that the identified as having a higher risk of bribery and corruption. We appropriate mitigation is in place. ‘Speak Up’ is our confidential hotline, also have to ensure compliance with trade sanctions, and import which is operated by an external third party with all reports passed to the and export controls. Director of Ethics and Compliance for review and investigation. Our internal audit team regularly runs checks on our business. We also use external providers to carry out assessments in areas we believe to be higher risk, to ensure our policies are understood and the controls are functioning. We selectively conduct due diligence checks on third parties including suppliers, agents, resellers and distributors. Our procurement contracts include anti- corruption and bribery clauses. We have implemented a policy to adhere to applicable sanctions and export control laws. The policy requires approval on all contract bids involving a country where sanctions are imposed by the EU or the US. The policy also mandates that our internal shipping system is used to arrange all international exports. The system conducts compliance checks and flags any orders which require an export licence.

802639 BT Group PLC.indb 23 5/19/2015 1:07:18 AM 24 BT plc Annual Report & Form 20-F 2015

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Supply chain

We operate in a global supply market. This enables us to While the size of the impact from a supplier failure can vary, • Deliver superior We have increased our focus on category management of suppliers. We conduct supplier risk analysis as part of our sourcing strategy and, where procure third-party products and services that help us deliver all supplier failures typically result in an increased cost to customer service Category management is a process that means our buyers can consolidate possible, take actions to reduce risk, such as through dual sourcing. to our customers wherever they are. There are often several our business and have the potential to adversely impact • Transform our costs specific categories of spend across all our businesses, so we can maximise We undertake on-site supplier assessments, to evaluate the risks associated links in the ‘chain’ of supply of a product or service to us. The customer service, our investments and our brand. In many the operational and procurement synergies. It helps mitigate the risk of BT with a supplier’s capability, capacity and competence to meet our integrity and continuity of this supply chain is critical to our cases, the costs associated with the failure of a critical supplier not reaching its cost transformation objectives by enabling us to leverage requirements in a predictable, ethical and sustainable manner. operations and therefore a significant risk to our business. could be significant, particularly if this eansm we have to better deals with our suppliers; and to intercept purchase orders where change technology. If we are unable to contract with an better terms are available elsewhere. BT operates a comprehensive in-life risk management process called We are committed to ensuring that all dealings with suppliers, alternative supplier, our customer commitments could also be from selection and consultation through to contracting and Increased focus on in-life contract management of our critical suppliers is ‘Supplier watch’ that recognises the supplier’s criticality to our strategy and compromised, possibly leading to contractual breach, loss of operations; and scans for changes across a range of commercial, financial, payment, are conducted in accordance with our trading and revenue or penalties. delivering benefits in terms of improved supplier contract performance and ethical policies. See Suppliers on page 12. risk control. operational and reputational risks. We check that the appropriate level of We are continually testing the global market for new sources supplier governance is in place across the group; and test that appropriate We have a number of suppliers that we have identified as of supply but this brings its own challenge of suppliers business continuity arrangements are in place for the risk of supplier failure. critical. The failure of one of these suppliers to meet its becoming more geographically and culturally diverse from our Over 330 critical suppliers, as nominated by the operational owners of the obligations could cause significant harm to our business. customers. business units that depend on them, are covered by the process. We are committed to evaluating and responding to any A failure in our supply chain to meet legal obligations or We look for signs of supplier distress that enable us to mitigate the risk associated risks where geo-political and market forces could ethical expectations could adversely impact our reputation or before it materialises. A small number of our critical suppliers went into impact our suppliers’ ability to support BT. possibly lead to censure, legal action and financial loss. administration in 2014/15, but, in each case, we were appropriately prepared with a business plan that minimised disruption to our customers. Socio-political, economic and environmental conditions in certain markets and geographies continue to challenge some of our suppliers; and highlight the need for appropriate due diligence across our supply chain. Protecting our brand from events in the supply chain, such as corrupt practices, the sourcing of conflict minerals or possible human rights abuse, continues to demand a high degree of focus.

Customer data processing

As a major data controller and processor of customer Failure to comply with relevant data protection and privacy • Deliver superior National regulatory authorities have demonstrated an increasingly We have a Privacy & Data Governance team which is led by the Chief Privacy information around the world we recognise the importance laws could result in varying degrees of negative impact for BT. customer service aggressive stance over the last 12 months with the application of financial Officer and has continued to recruit individuals with the appropriate skills of adhering to data privacy laws. Every day we process the These include the possibility of regulatory enforcement action, penalties to both private and public organisations in breach of their data and experience as the remit of this team expands. personal data of millions of consumer and business customers fines, class actions, custodial sentences and a regulatory privacy obligations. The Chief Privacy Officer oversees a robust governance and monitoring and we want individuals to feel confident that when they give instruction to cease processing data. For the first time in the UK, the ICO imposed more fines than Ofcom. Outside framework. This defines roles and responsibilities as part of a wider approach their personal data to us they can trust us to do the right thing We could also face reputational damage and financial loss the UK, global organisations felt the force of their domestic regulators with to data assurance which utilises independent audits and reviews. We track all with it. from the failure to meet our legal requirements, as well notably the French Information Commissioner (CNIL) and the US Federal mitigations to resolution to ensure that senior management are aware of the Being trusted with customer data goes further than making as incurring costs resulting from termination of customer Communications Commission’s Enforcement Bureau imposing significant risk and how it impacts respective parts of our business. sure it is secure. It is about ensuring the integrity of the personal contracts and subsequent customer churn. Companies, such as penalties on organisations for poor compliance practices. data we process, only retaining the information that we need Sony which has suffered high profile data incidents, have seen We have developed new online tools and awareness programmes to to provide customers with the services for which they have a significant negative impact on their share price combined The sensitivity of this risk is expected to increase as new, more robust data make sure that our people comply in their day-to-day activities where signed up. It is also about being transparent around how we use with additional costs associated with non-compliance. privacy laws are introduced throughout the scope of our operations. The they handle personal information. In addition to raising awareness of that data, making sure the personal data is processed legally, continuing debate around the future EU General Data Protection Regulation Privacy by Design, an approach to projects that promotes privacy and data fairly and in line with customers’ rights and wishes. Through is already influencing how multinational businesses address this risk. protection compliance from the start, we have also deployed Privacy Impact embedding a robust data governance framework we have Assessment tools as part of the design process around new products and reinforced our expectations around personal data with our services. employees, partners and third parties. Our focus on broader training and awareness will see a new data privacy As a telecoms and internet service provider we operate module, which our people will need to complete, deployed with role- under a stringent 24-hour reporting regime to notify the UK specific scenarios for specific job families. As part of this bespoke approach Information Commissioner’s Office (ICO) should we become to managing the risk, for the first time we will have a module designed aware of a personal data security breach and to notify those specifically for the contact centre environment to highlight the diverse individuals who may have been impacted without undue delay. number of responsibilities our contact centre people have when dealing with customer data.

02b_802639_Report of the Directors_Strategy_p14-28.indd 24 5/28/2015 10:20:34 AM The Strategic Report 25 Delivering our strategy

Risk description Impact Link to strategy Changes over the last year Risk mitigation

Supply chain

We operate in a global supply market. This enables us to While the size of the impact from a supplier failure can vary, • Deliver superior We have increased our focus on category management of suppliers. We conduct supplier risk analysis as part of our sourcing strategy and, where procure third-party products and services that help us deliver all supplier failures typically result in an increased cost to customer service Category management is a process that means our buyers can consolidate possible, take actions to reduce risk, such as through dual sourcing. to our customers wherever they are. There are often several our business and have the potential to adversely impact • Transform our costs specific categories of spend across all our businesses, so we can maximise We undertake on-site supplier assessments, to evaluate the risks associated links in the ‘chain’ of supply of a product or service to us. The customer service, our investments and our brand. In many the operational and procurement synergies. It helps mitigate the risk of BT with a supplier’s capability, capacity and competence to meet our integrity and continuity of this supply chain is critical to our cases, the costs associated with the failure of a critical supplier not reaching its cost transformation objectives by enabling us to leverage requirements in a predictable, ethical and sustainable manner. operations and therefore a significant risk to our business. could be significant, particularly if this means we have to better deals with our suppliers; and to intercept purchase orders where change technology. If we are unable to contract with an better terms are available elsewhere. BT operates a comprehensive in-life risk management process called We are committed to ensuring that all dealings with suppliers, alternative supplier, our customer commitments could also be from selection and consultation through to contracting and Increased focus on in-life contract management of our critical suppliers is ‘Supplier watch’ that recognises the supplier’s criticality to our strategy and compromised, possibly leading to contractual breach, loss of operations; and scans for changes across a range of commercial, financial, payment, are conducted in accordance with our trading and revenue or penalties. delivering benefits in terms of improved supplier contract performance and ethical policies. See Suppliers on page 12. risk control. operational and reputational risks. We check that the appropriate level of We are continually testing the global market for new sources supplier governance is in place across the group; and test that appropriate We have a number of suppliers that we have identified as of supply but this brings its own challenge of suppliers business continuity arrangements are in place for the risk of supplier failure. critical. The failure of one of these suppliers to meet its becoming more geographically and culturally diverse from our Over 330 critical suppliers, as nominated by the operational owners of the obligations could cause significant harm to our business. customers. business units that depend on them, are covered by the process. We are committed to evaluating and responding to any A failure in our supply chain to meet legal obligations or We look for signs of supplier distress that enable us to mitigate the risk associated risks where geo-political and market forces could ethical expectations could adversely impact our reputation or before it materialises. A small number of our critical suppliers went into impact our suppliers’ ability to support BT. possibly lead to censure, legal action and financial loss. administration in 2014/15, but, in each case, we were appropriately prepared with a business plan that minimised disruption to our customers. Socio-political, economic and environmental conditions in certain markets and geographies continue to challenge some of our suppliers; and highlight the need for appropriate due diligence across our supply chain. Protecting our brand from events in the supply chain, such as corrupt practices, the sourcing of conflict minerals or possible human rights abuse, continues to demand a high degree of focus.

Customer data processing

As a major data controller and processor of customer Failure to comply with relevant data protection and privacy • Deliver superior National regulatory authorities have demonstrated an increasingly We have a Privacy & Data Governance team which is led by the Chief Privacy information around the world we recognise the importance laws could result in varying degrees of negative impact for BT. customer service aggressive stance over the last 12 months with the application of financial Officer and has continued to recruit individuals with the appropriate skills of adhering to data privacy laws. Every day we process the These include the possibility of regulatory enforcement action, penalties to both private and public organisations in breach of their data and experience as the remit of this team expands. personal data of millions of consumer and business customers fines, class actions, custodial sentences and a regulatory privacy obligations. The Chief Privacy Officer oversees a robust governance and monitoring and we want individuals to feel confident that when they give instruction to cease processing data. For the first time in the UK, the ICO imposed more fines than Ofcom. Outside framework. This defines roles and responsibilities as part of a wider approach their personal data to us they can trust us to do the right thing We could also face reputational damage and financial loss the UK, global organisations felt the force of their domestic regulators with to data assurance which utilises independent audits and reviews. We track all with it. from the failure to meet our legal requirements, as well notably the French Information Commissioner (CNIL) and the US Federal mitigations to resolution to ensure that senior management are aware of the Being trusted with customer data goes further than making as incurring costs resulting from termination of customer Communications Commission’s Enforcement Bureau imposing significant risk and how it impacts respective parts of our business. sure it is secure. It is about ensuring the integrity of the personal contracts and subsequent customer churn. Companies, such as penalties on organisations for poor compliance practices. data we process, only retaining the information that we need Sony which has suffered high profile data incidents, have seen We have developed new online tools and awareness programmes to to provide customers with the services for which they have a significant negative impact on their share price combined The sensitivity of this risk is expected to increase as new, more robust data make sure that our people comply in their day-to-day activities where signed up. It is also about being transparent around how we use with additional costs associated with non-compliance. privacy laws are introduced throughout the scope of our operations. The they handle personal information. In addition to raising awareness of that data, making sure the personal data is processed legally, continuing debate around the future EU General Data Protection Regulation Privacy by Design, an approach to projects that promotes privacy and data fairly and in line with customers’ rights and wishes. Through is already influencing how multinational businesses address this risk. protection compliance from the start, we have also deployed Privacy Impact embedding a robust data governance framework we have Assessment tools as part of the design process around new products and reinforced our expectations around personal data with our services. employees, partners and third parties. Our focus on broader training and awareness will see a new data privacy As a telecoms and internet service provider we operate module, which our people will need to complete, deployed with role- under a stringent 24-hour reporting regime to notify the UK specific scenarios for specific job families. As part of this bespoke approach Information Commissioner’s Office (ICO) should we become to managing the risk, for the first time we will have a module designed aware of a personal data security breach and to notify those specifically for the contact centre environment to highlight the diverse individuals who may have been impacted without undue delay. number of responsibilities our contact centre people have when dealing with customer data.

802639 BT Group PLC.indb 25 5/19/2015 1:07:18 AM 26 BT plc Annual Report & Form 20-F 2015

EE acquisition: risks Realising synergies following integration The proposed acquisition of EE by BT Group plc creates additional BT is targeting significant synergies from the acquisition. The risks for BT beyond those captured in our principal risks and financial planning for the enlarged group is based partly on realising uncertainties. In the section below we highlight those risks relating these synergies, which include expected operating cost savings and to the acquisition, and new risks that would be relevant to the capital expenditure savings of £360m per year, to be realised in enlarged group. These risks were described in the shareholder the fourth full year following completion. Combining the respective circular in relation to BT Group plc’s proposed acquisition of EE and businesses is also expected to give rise to further benefits. These we repeat them below. include (among other things), fixed-mobile convergence, the ability to serve customers through a single, seamless platform supported Risks related to the acquisition by a single IP network, and being able to offer BT products to EE In the period through to completion of the acquisition there are customers and EE products to BT customers. risks relating to the deal itself, as well as business risks during this transitional phase. The success of the enlarged group will depend, in part, on the effectiveness of the integration process and the ability to realise the Approval of the acquisition anticipated benefits and synergies from combining the businesses. Completion of the acquisition is conditional upon satisfaction or, Some of the potential challenges in combining the businesses may where capable of being waived, waiver of various conditions. In not be known until after completion. If these challenges cannot the event that these conditions are not satisfied or, where they can be overcome, for example because of unforeseen difficulties in be waived, waived by the ‘long stop date’ (or a later date which implementing fixed-mobile convergence or a lack of customer BT Group plc agrees with the sellers), the Share Purchase Agreement demand for the offerings, the anticipated benefits of the acquisition will automatically terminate. There can be no assurance that the will not be fully achieved. conditions will be fulfilled or waived, or that the acquisition will be completed. Realisation of synergies will depend partly on the rapid and efficient management and co-ordination of the activities of the enlarged The acquisition is subject to merger control approval from the group’s businesses. BT may experience difficulties in integrating Competition and Markets Authority (CMA) in the UK. Approval EE with our existing businesses and may not realise, or it might from the CMA may take longer than expected to obtain, may not take longer than expected to realise, certain or all of the perceived be granted, or may be granted subject to conditions or remedies, benefits of the acquisition. There is also a risk that synergy including BT’s or EE’s divestment of assets or businesses and/or benefits and growth opportunities from the acquisition may fail to restrictions on the conduct of the enlarged group. Any of these could materialise, or may be materially lower than have been estimated. delay or jeopardise completion, impose sustained additional costs for In addition, the costs of generating these synergies, which are the enlarged group and/or materially reduce the anticipated benefits expected to be around £600m, may exceed expectations. (including synergy benefits) of the acquisition, or result in a material adverse effect on the enlarged group’s business, financial condition Failure to deliver the anticipated synergies and business and results of operations. opportunities could have a material adverse effect on the enlarged group’s businesses, financial conditions and results of operations, EE’s performance prior to completion of the acquisition including its ability to support its pension deficit. The anticipated benefits and synergies of the acquisition have been developed based on assumptions regarding (among other things), Increased cost of debt EE’s financial and operational performance, including in the period The enlarged group may face increased costs when it seeks to before completion when EE’s performance is outside BT’s control. refinance or repay its debt as a result of its increased level of debt During this time, EE’s performance – and that of BT – could be following the acquisition. negatively impacted by one or more of the following: The acquisition will be funded in part by a £3.6bn debt bridge • an adverse event, or events, affecting EE which would not give facility, which may be extended for an additional 12 months rise to a right of BT Group plc to terminate the acquisition; following its one year maturity. • as a result of the planned acquisition, some of BT’s or EE’s The costs and other terms on which the enlarged group is able customers or strategic partners may terminate or reduce their to refinance the debt bridge facility and other longer-term business relationships with the enlarged group, for example to indebtedness will depend partly on market conditions; unfavourable avoid sourcing too great a proportion of services from a single economic conditions could impact the cost and terms on which company; the enlarged group is able to access capital markets to refinance its • potential customers of BT or EE may delay entering into, or indebtedness which may increase its cost of capital. decide not to enter into, a business relationship with BT or EE until completion because of perceived uncertainty over the Risks to the enlarged business acquisition; Although a number of the risks EE faces are similar in nature to those • EE may fail to retain key personnel and other employees; and potentially impacting BT today, there are also a number of distinct • third parties may terminate or alter existing contracts with EE risks that the enlarged group will face that we do not currently as a result of the acquisition, in particular where ‘change of perceive to be significant threats to BT. control’ or similar clauses apply. This section outlines some of those new risks and uncertainties, but If any of these happen, the value of EE may be less than the it is not exhaustive. These risks have the potential to impact the consideration paid by BT Group plc and, accordingly, the net assets enlarged group’s business, people, brand, assets, revenue, profits, of the enlarged group could be reduced. This could have a material liquidity or capital resources. adverse effect on the enlarged group’s financial position. BT’s Enterprise Risk Management framework will continue to operate in the enlarged group and provides reasonable (but cannot give absolute) assurance that significant risks are identified and addressed. There may be some risks which are unknown to us at

802639 BT Group PLC.indb 26 5/19/2015 1:07:18 AM The Strategic Report 27 Delivering our strategy

present. And there may be some that we consider less significant As demand for smartphone and tablet products increases around now but become more important later. the world, there could be shortages in the volume of devices produced as a result of insufficient manufacturing capacity, the lack Handset and network development of availability of internal components such as processors or major The enlarged group’s operations will depend partly on the successful supply chain disruptions. This may result in delays in the supply chain deployment of continuously evolving telecommunications which in turn may have an adverse effect on the enlarged group’s technologies. business and operations. Delays in the development of handsets and network compatibility Spectrum pricing and regulation and components may hinder the deployment of new technologies Regulators, including Ofcom, set annual licence fees for spectrum for the enlarged group. bands used by EE for voice calls, 3G and 4G services and EE is a EE uses technologies from a number of vendors and incurs party to an ongoing consultation with Ofcom in relation to this. Any significant capital expenditure deploying these technologies. There significant increases in spectrum pricing applicable to the enlarged can be no assurance that common standards and specifications group could have a material adverse effect on its business and results will be achieved, that there will be interoperability across BT’s, EE’s of operations. and other networks, that technologies will be developed according Ofcom may, after consultation, vary conditions in relation to to anticipated schedules, that they will perform according to spectrum licences. EE will monitor any developments from regulators expectations or that they will achieve commercial acceptance. relating to the allocation of mobile spectrum in the UK. The introduction of software and other network components may also be delayed. The failure of vendor performance or technology The scope and form of the regulation of wholesale services is performance to meet our expectations or the failure of a technology reviewed every three years and can include controls on the level of to achieve commercial acceptance could result in additional capital prices charged for regulated inputs. expenditure by, or a reduction in profitability of, the enlarged group. As technology and market dynamics develop and as the mobile Technological change and market acceptance business of EE is integrated into BT then a wider range of existing The enlarged group may not succeed in making customers regulations will apply to the enlarged group and a broader range of sufficiently aware of existing and future services or in creating new and/or modified regulations may be directed at us. customer acceptance of these services at the prices we would want Network and licence investment to charge. Also, the enlarged group may not identify trends correctly, EE (as well as BT to a lesser extent), has made substantial or may not be able to bring new services to market as quickly or investments in the acquisition of licences and EE has invested in its price-competitively as its competitors. mobile networks, including modernising its 2G network, the upgrade These risks exist in the mobile telecommunications area (such as of its 3G network and the continued expansion of its 4G network mobile data services or other advanced technologies which are which was launched in October 2012. EE expects to continue to supported by advanced smartphone products). They also exist in make significant investments in its mobile networks due to increased the non-mobile telecommunications areas (such as mobile payment usage and the need to offer new services and greater functionality. services based on contactless technology) where there is a risk that It may acquire new spectrum licences with licence conditions which differences in the regulatory treatment of different operators based may include network coverage obligations or increased licence fees. on their choice of technology could put the enlarged group at a Accordingly, the rate of the enlarged group’s capital expenditure and competitive disadvantage. costs in future years could increase and exceed those expected or experienced to date. Further, as a result of rapid technological progress and the trend towards technological convergence, new and established There can be no assurance that new services will be introduced information and telecommunications technologies or products according to anticipated schedules or that the level of demand for may not only fail to complement one another but in some cases, new services will justify the cost of setting up and providing new may even become a substitute for one another. An example of services (in particular, the cost of new network spectrum licences this is the risk that ‘over-the-top’ services (being those which are and network infrastructure, eg for 4G services and subsequent provided by a third party to the end user device) develop substitutes evolutions). Failure or a delay in completing networks and launching for BT’s and EE’s own products and services. Another example new services, or increases in the associated costs, could have an is VoIP, a technology that is already established in the business adverse effect on the enlarged group’s business and operations customer market and which has now reached the consumer market. and could result in significant write downs of the value of network The introduction of mobile handsets with VoIP functionality spectrum or other licences or other network-related investments. may adversely affect the enlarged group’s pricing structures and If the current economic climate worsens, the enlarged group may market share in its mobile voice telephony business. If we do not decide, or be required, to scale back capital expenditures. A lasting appropriately anticipate the demand for new technologies, and reduction in capital expenditure levels below certain thresholds adapt our strategies, service offering and cost structures accordingly, could affect our ability to invest in our mobile telecommunications the enlarged group may be unable to compete effectively, which may network (including additional spectrum), new technology and our have an adverse effect on our business and operations. other businesses and therefore could have an adverse effect on our Supplier failure future growth and the value of radio spectrum. EE has a number of suppliers identified as critical. EE is also party to a complex and critical network-sharing arrangement with Hutchison Whampoa Limited. The failure of this joint operation to fully support the enlarged group’s interests and goals, or any material disruption to the operation of EE’s network sharing arrangement, could cause significant harm to the enlarged group’s business.

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Transmission of radio waves Media reports have suggested that radio frequency emissions from wireless mobile devices and mobile telecommunications sites may cause health issues, including cancer, and may interfere with some electronic medical devices, including hearing aids and pacemakers. Research and studies are ongoing. The World Health Organisation has declared that, on the basis of current scientific knowledge, there are no known adverse effects on health from emissions at levels below internationally recognised health and safety standards. However, the enlarged group cannot provide assurance that research in the future will not establish links between radio frequency emissions and health risks. Whether or not research or studies conclude that there is a link between radio frequency emissions and health, popular concerns about radio frequency emissions may discourage the use of wireless devices, impairing the enlarged group’s ability to retain customers and attract new customers, and may result in restrictions on the location and operation of mobile communications sites and the usage of the enlarged group’s wireless technology. These concerns could also lead to litigation against the enlarged group. Any restrictions on use or litigation could have an adverse effect on the enlarged group’s business and operations.

802639 BT Group PLC.indb 28 5/19/2015 1:07:18 AM The Strategic Report 29 Our lines of business

Our lines of business

This section explains more about our lines of business. We provide We provide specific solutions and expertise to ten key industry information on the products and services we sell. We explain the sectors through four regional operations: UK; Continental Europe; US different customers and markets we serve, the trends we are seeing and Canada; and high-growth regions (Asia Pacific, Middle East and in our markets and how each of our lines of business performed this Africa, and Latin America). year. We also describe the role and responsibilities of BT TSO, our internal service unit. Markets and customers We work for around 6,500 large corporate and public sector Our business is structured to best serve our customers – responding customers in more than 170 countries worldwide. We provide to their needs and delivering value to them. services for: • 98% of the FTSE100 companies; How we are organised • 82% of the Fortune 500 companies; We have five customer-facing lines of business: BT Global Services, • 96% of Interbrand’s annual ranking of the top 50 most valuable BT Business, BT Consumer, BT Wholesale and Openreach. They are brands in the world; supported by our internal service unit, BT Technology, Service & • over 90% of the world’s top financial institutions; and Operations. • public sector organisations in 22 countries around the world. BT Global Services is our largest line of business by revenue, Across the world, our main competitors are global telecommunications generating 38% of the group’s external revenue. BT Consumer is the companies such as AT&T, Orange, Telefónica, Verizon and Vodafone. next largest, contributing 24%. We also compete against IT and business process management Around 60% of Openreach’s revenue is generated from other BT companies, the latter particularly in the UK public sector. lines of business so its contribution to external group revenue is We generate over two-thirds of our revenue from corporate the smallest, at 11%. Total Openreach revenue is equivalent to customers. Of these, financial institutions are our largest segment, 28% of group revenue. It is the group’s largest EBITDA contributor, generating 18% of our revenue in the year. generating 41% of the total, reflecting the return it earns on its extensive network assets. But as a capital-intensive business, The public sector generated 20% of our revenue. As a leading Openreach incurs costs relating to depreciation, which are not supplier to the UK Government’s Public Services Network (PSN), we reflected in this EBITDA contribution. are helping the Government to drive its digital agenda. However, we expect to face continued declines in the revenue we earn from the BT Global Services’ EBITDA margins are below those of the other UK public sector due to lower levels of government expenditure. lines of business. At 17%, its proportion of group EBITDA is therefore below its overall revenue contribution. Around 10% of our revenue comes from providing a range of services to other telecoms companies, of which half is transit Almost 40% of our people work in Openreach. Many of them are revenue. engineers, responsible for maintaining and upgrading our networks. A quarter of our people are in BT TSO and within group functions, Our top 1,000 customers generate around 90% of our revenue. supporting all the customer-facing lines of business. And 20% These companies typically allocate less than 10% of their total IT work in BT Global Services, with many supporting and serving our and communications spend with us. So we see an opportunity to customers worldwide. grow our share of their spending.

Internal reorganisation The UK is our largest region by revenue. Financial institutions and With effect from 1 April 2014 BT Conferencing and BT Security were government and healthcare customers are particularly important in moved into BT Global Services from BT Business and our central this market. We have been ranked by Current Analysis as the number group functions respectively. We did this to help us simplify the one provider in the UK public sector, as well as a leader in the UK IP way we provide integrated collaboration solutions to our global telephony and unified communications market. customers, better compete in the market and take full advantage of We have a strong presence in Continental Europe, with national global opportunities. networks and metropolitan fibre rings in most major markets, These organisational changes did not impact the results of BT including Belgium, France, Germany, Italy, the Netherlands and Consumer, BT Wholesale or Openreach and had no impact on the Spain. In this region we serve a large number of customers in the total group results. We have restated the comparative results for pharmaceutical, retail, financial servicesand automotive industries. BT Global Services, BT Business and Other to present them on a The US and Canada region is important for us because of the high consistent basis. We have provided further information, including proportion of multinational corporations headquartered there. the amounts involved, in note 4 to the consolidated financial However our biggest challenge in the US continues to be ineffective statements on page 73. regulation of wholesale access to incumbent operator networks. The US regulator is taking steps to analyse this market, and we are BT Global Services actively engaged in the process. We are a global market leader for managed networked IT services. The high-growth regions of Asia Pacific, the Middle East and We help around 6,500 large corporate and public sector customers Africa (AMEA) and Latin America are increasingly important for across more than 170 countries embrace the digital age, innovate our customers. We are helping multinationals expand into these and work more efficiently. areas and supporting local companies as they grow internationally. By combining our strengths in networks, IT and innovation, with We continue to invest in these markets by adding products and our global reach, local delivery, industry expertise and professional services and improving our network and IT infrastructure. services, we help our customers to make connections and create This year, we launched an innovative global campaign ‘the Art new possibilities. 62% of our people are based outside the UK, in of Connecting’ to help our customers address their key business 60 countries. challenges in areas such as cloud, mobility and security. To improve

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the way we provide integrated solutions to our global customers, the way they interact with their customers, colleagues, partners and BT Security and BT Conferencing moved into BT Global Services in suppliers. April 2014. BT Contact Influential analyst firms recognise us in the markets for global Our contact centre services help our customers build stronger network services and communications outsourcing and professional relationships with their customers. We offer a number of ways for services. This year we were positioned as a Leader in Gartner’s them to communicate together, including email, web chat, video, 2015 Magic Quadrant for Network Services, Global for the 11th social media and the phone – either via automated systems or time. We have also been recognised as a Leader in Gartner’s 2014 dedicated advisers. Our cloud solutions give companies more control Communications Outsourcing and Professional Services Magic over their costs, allowing them to change capacity in response to a Quadrant for the fifth consecutive year . demand. The markets we operate in are competitive and we continue to BT Compute face pricing pressure. But we see good growth potential in the Businesses want reliable but flexible IT platforms and services for areas where we are investing. For example, Ovum predicts unified their applications, data storage and security. We provide IT services communications services will grow at a rate of 18% a year globally across our network, from 46 data centres around the world. Our over the next three yearsb. Gartner forecasts that cloud computing services range from traditional telehousing and colocation to the services will grow globally at a rate of 31% a year over the next three latest public, private and hybrid cloud solutions. yearsc. And it expects managed security services to grow at a rate of d 15% a year globally over the same period . BT Advise Products and services We have experts around the world who provide consulting, We deliver value to our customers by bringing together a broad integration and managed services to our customers. They have a portfolio of products and services with industry-specific solutions range of specialisms, certifications and accreditations to make sure and consulting expertise. Our network is at the core of what we our customers get the best out of our products and services. Our provide. We have simple product categories organised around what approach looks beyond technology to create solutions that work our customers need. These are: across all areas of an organisation.

BT Connect Industry propositions Our network services connect our customers to their people, to Our innovative sector-specific solutions help our customers their own customers, to the cloud and to the world. We offer a overcome challenges unique to their industry. For example, our ‘BT range of flexible, intelligent and secure IP, Ethernet and internet for Retail’ portfolio enables retailers to enhance shoppers’ in-store virtual private network services. We deliver these in more than experience by sending targeted messages to mobile devices and 170 countries over a range of access technologies including DSL, using intelligent in-store signage. And our Field Force Automation Ethernet and satellite. solutions provide mobile employees such as field engineers with access to corporate applications wherever they are. BT Assure Our customers often use our products and services to reduce Customers are prioritising security as cyber-attacks become more their impact on the environment. For instance, our BT One unified common and potentially more disruptive. We provide a range of communications and collaboration services helped Sasol achieve products and services to help protect organisations against these travel savings of more than a million kilometres, preventing 40 threats including firewalls, web security, intrusion prevention and metric tonnes of carbon emissions, in the first six months of the threat monitoring. contract. BT One Organisations also look to us to help them innovate to enhance Businesses communicate in a number of different ways – by phone, their customers’ experience and engagement. We are working instant messaging, email, audio and video conferencing and with Alder Hey Children’s Hospital in Liverpool to develop a data-sharing solutions. They want these channels to be integrated patient entertainment system for their new hospital. We are also and work together easily and reliably. Our collaboration services help partnering with Coca-Cola in South Africa to set up wi-fi on their customers simplify their communications channels and transform drinks machines, providing free internet access to impoverished communities. a Gartner, Magic Quadrant for Communications Outsourcing and Professional Services, Christine Tenneson, Eric Goodness, Bjarne Munch, 04 November 2014. Performance in the year Gartner, Magic Quadrant for Network Services, Global, Neil Rickard, Bjarne Munch, 14 January We have consolidated our position as a global leader for managed 2015. Gartner does not endorse any vendor, product or service depicted in its research publications, and networked IT services. We have improved our customer service. does not advise technology users to select only those vendors with the highest ratings or other We grew revenuee in the high-growth regions of the world and designation. Gartner research publications consist of the opinions of Gartner’s research organisation and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or Continental Europe, but lower public sector revenue in the UK implied, with respect to this research, including any warranties of merchantability or fitness for a resulted in overall revenue declining. Despite this, we grew EBITDA particular purpose. b Hosted and Managed Unified Communications Services Forecast, 2014-19 (Ovum, January 2014). driven by our cost transformation activities. Our operating cash c Forecast: IT Services, Worldwide, 2013-2019, 1Q15 Update (March 2015). inflow of £349m was lower than we achieved last year, when we had d Forecast: Information Security, Worldwide, 2013-2019, 1Q15 Update (April 2015). benefited from some early customer receipts. The Gartner Report(s) described herein, Magic Quadrant for Network Services, Global, Neil Rickard, Bjarne Munch (Gartner, January 2015) and Magic Quadrant for Communications Outsourcing and Professional Services, Christine Tenneson, Eric Goodness, Bjarne Munch (Gartner, November 2014) Operating performance and Forecast: IT Services, Worldwide, 2013-2019, 1Q15 Update (March 2015) and Forecast: Information Security, Worldwide, 2013-2019, 1Q15 Update (April 2015) represent(s) data, We achieved an order intake of £6.5bn, down 7% after last year research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, benefited from some large contract re-signs. In line with our strategy Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Filing) and the opinions expressed in the Gartner to grow our share of wallet, we increased our new business order Report(s) are subject to change without notice. intake with our top priority customers. e Underlying excluding transit.

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Contracts we won in the year include: likelihood to recommend BT and their perception of BT as a business partner were offset by changes in spending patterns and a greater Customer Contract focus on value for money among some of our customers. We try to make a positive difference to the communities where we Cathay Pacific To provide the airline’s global call do business. Through our Connecting Africa project and our work (BT Contact) centre infrastructure. with international charity SOS Children’s Villages, we launched a Genome Institute Cloud compute infrastructure to programme to develop a healthcare management IT system. This will of Singapore create a cloud-based next generation be deployed at seven SOS Medical Centres in six African countries in (BT Compute) genome sequencing environment. 2015/16. We are also helping the United Nations and NetHope in Sierra Leone Kimberly-Clark To implement and manage cloud- to tackle the Ebola crisis by quickly extending satellite capability to (BT One) based solutions for a global network of improve communications. 42,000 users. Transform our costs Procter and Gamble Managed network and security We reduced our underlying operating costs excluding transit by (BT Connect) services in more than 80 countries. 5%, reflecting the impact of lower revenue as well as our cost Sasol (BT Connect) Managed security, conferencing, transformation programmes. We have driven costs down by applying collaboration and other network best practice from other parts of the group and by taking our services connecting 118 sites across forensic UK approach overseas. In the year we continued to: the world. • optimise our operating model. We simplified our organisational Smart DCC, subsidiary A security solution for the UK smart structure in Switzerland and Eastern Europe by rationalising of the Capita Group metering programme. management layers. This will save £5m a year, and has removed (BT Assure) process failures and improved customer service; • reduce failures in our processes. For example, we have reduced Société Générale Voice and data communication the lead times for ceasing third-party access circuits that we no (BT Connect) services across 30 countries. We will longer need, saving over £20m a year; also deploy wi-fi services across • transform and optimise our global network. We are building 70 sites in France. new network infrastructure that supports our core products, increases coverage and lowers the cost of long distance access Royal Mail Provision of 76,000 handheld devices lines; and (mobility services) to UK postmen and women for • improve third-party supplier value for money by negotiating scanning parcels. better commercial terms. We are also directly insourcing the delivery of some of our products and services. Welsh Government To provide the country-wide public (BT Connect) sector broadband network, supporting Invest for growth more than 80 public service We have continued to invest to enhance our global capabilities in line organisations across 4,000 sites. with the plans we shared last year. For example, we have invested in our global account management capabilities and made our products and services more flexible and better at working together. Deliver superior customer service We have also invested in: We gather feedback from our customers in many different ways, • the high-growth regions. We have extended the reach and including through our global account management teams and by features of our services. We launched new, cloud-based, unified using surveys. communication and collaboration services in AMEA, and added This year we have made progress on improving customer service cloud-enabled data centres in countries including Argentina, by enhancing our systems, processes and the way we manage our Colombia and South Africa; relationships with customers and suppliers. However, our customers • our network. By building acceleration and security features tell us there is still more we can do to keep them better informed and into the network we are increasing application performance, further improve our speed of service delivery, particularly in the UK. reducing bandwidth costs and improving security for our customers. We extended Ethernet Connect to ten new countries, During the year we: bringing the total to 60. We launched Internet Connect Reach • improved the speed of service delivery of our main products by to expand internet coverage in more than 190 countries and 25%. We will continue to act on feedback and focus on this in territories. And we added ten new IP Connect points of presence 2015/16; (PoPs) in countries including Iceland and Malaysia; • reduced a backlog of orders for IP Connect Global (our main • our core products and services. We added an innovative new global MPLS product) by more than 70%, which will mean we service to our BT Contact portfolio which allows businesses can deliver services more quickly in the future; to send short, personalised videos to their customers. We • introduced new service packages to make it easier for introduced BT Assure Threat Defence to help our customers customers to choose the level of service support they need; and better identify and react to sophisticated cyber-security • introduced new processes for our major accounts to make sure threats. We also made BT MeetMe with Dolby Voice available in we deal with issues quickly. more countries, integrated it with Cisco WebEx and Microsoft Lync and launched the Dolby Conference Phone; As a result of these improvements, we increased our Right First • industry-specific solutions. We launched BT Netrix HiTouch, a Time measure 8.6% this year (2013/14: 0.6%). While we saw an new touchscreen device for financial markets. It allows traders improvement in loyalty among our top global customers, overall to tap into hundreds of applications, market data feeds and customer loyalty declined 2% to 75%. Improvements in customers’ communications services, all delivered by the BT Radianz Cloud.

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We also opened two retail experience showcases, one in New BT BUSINESS York and one in Milan; and BT Business provides communications and IT services in the UK and • BT Advise. We have simplified our offers, improved our the Republic of Ireland (RoI). We serve around 900,000 customers, consulting methodologies and are better at aligning our with a leading position in fixed-voice, networking and broadband advisory services with our products and industry sectors. services.

Financial performance BT Business has four customer-facing divisions: UK SME; UK 2015 2014a 2013a Corporate; BT Ireland; and BT Business Solutions. Year ended 31 March £m £m £m Revenue 6,779 7,269 7,392 UK SME – Underlying revenue excluding transit (4)% (1)% (6)% UK SME supplies small businesses in Great Britain (typically up to Net operating costs 5,732 6,228 6,442 100 employees) with fixed-voice, broadband, mobility, networking EBITDA 1,047 1,041 950 and IT services. It also has three specialist businesses: Depreciation and amortisation 519 616 634 Business Providing: Operating profit 528 425 316 Capital expenditure 468 516 535 BT Redcare Fire and security alarm signalling Operating cash flow 349 499 314 services, surveillance networks and

a Restated, see notes 1 and 4 to the consolidated financial statements. control room services.

Revenue decreased 7% (2013/14: 2%) including a £206m BT Directories Directory Enquiries, The Phone Book, negative impact from foreign exchange movements and a £9m website services, operator services and decline in transit revenue. Our key revenue measure, underlying call handling for the emergency services. revenue excluding transit, decreased 4% (2013/14: 1%) primarily BT Payphones Public, private and managed payphone reflecting lower UK public sector revenue. services. We generated growth in underlying revenue excluding transit of 9% in the high-growth regions (2013/14: 16%) reflecting the UK Corporate signing of key deals and the benefit of newly-launched capabilities, UK Corporate supplies larger businesses in Great Britain (typically products and services. Continental Europe generated 2% growth 100-1,000 employees) with fixed-voice, broadband, mobility, in underlying revenue excluding transit (2013/14: 2% decline) networking and IT services. We offer bespoke solutions in addition to reflecting higher spending by our existing customers. our core portfolio of products. UK revenue decreased 11% (2013/14: 4%) mainly reflecting BT Fleet also sits within this division. It is one of the UK’s leading continued declines in public sector trading. Underlying revenue providers of fleet management, vehicle maintenance and accident excluding transit in the US and Canada declined 3% (2013/14: 2%). management services.

Operating costs decreased 8% (2013/14: 3%). Underlying BT Ireland operating costs excluding transit decreased 5% (2013/14: 2%) In Northern Ireland, we are the largest provider of communications reflecting the impact of lower revenue and our cost transformation services for SMEs and a leading supplier of networked IT services for programmes. public sector and corporate customers. EBITDA increased 1% (2013/14: 10%) and was up 3% excluding In the Republic of Ireland, we provide networked IT services for the foreign exchange movements. Depreciation and amortisation public sector and large businesses and we provide wholesale services decreased 16% (2013/14: 3%) as a result of lower depreciation to other communications providers. on some UK public sector contracts and the impact of some assets becoming fully depreciated. Operating profit increased by £103m or 24% (2013/14: £109m or 35%). Capital expenditure decreased 9% (2013/14: 4%). EBITDA less capital expenditure increased by £54m to £579m compared with an increase of £110m last year. Our operating cash inflow of £349m was £150m lower than last year. This was largely driven by a year-on-year impact of around £120m from early customer receipts in the fourth quarter of last year.

Key priorities We are focused on strengthening our position as a global leader. Our future priorities include: • building broader and deeper relationships with our major customers; • improving our award-winning products and services with a particular focus on security, mobility and cloud-based services; • transforming our customer service through improving customer journeys end to end, increasing automation and launching new service propositions; and • driving down cost to become a more efficient organisation, letting us invest in the things that set us apart from our competitors.

802639 BT Group PLC.indb 32 5/19/2015 1:07:19 AM The Strategic Report 33 Our lines of business

BT Business Solutions Fixed-lines We have four specialist IT services businesses: There are 7.7m (2013/14: 8.3m) business lines in the UK, including those used by both SMEs and large corporate businesses. Some of Business Providing: these lines are provided by BT Global Services. There are more lines than individual businesses as many customers buy more than one BT IT Services IT equipment and networked IT line. solutions, managed and support services, and consulting services. The number of business fixed-lines has gone down over the last few years. Companies have replaced some of them with VoIP or mobiles. BT Business Direct IT and communications hardware and Businesses have also made fewer calls over their fixed-lines because software, including computing and of the growth in email and other online communication such as networking equipment, sold online. instant messaging. Call volumes in the market are 12% lower than a year earlier. BT Expedite IT services for the retail sector. BT has a 43% market share of business lines (excluding VoIP), down BT Tikit IT products and services for legal and two percentage points in the year. accountancy firms. Broadband BT IT Services was created from the former BT iNet and BT Engage IT, The market for broadband continues to grow, but more slowly now which were integrated into one unit and rebranded this year. For BT that most businesses already have it. In contrast, demand for fibre Business customers, it sells its products through the UK SME and UK broadband is growing strongly, as customers migrate from copper- Corporate channels (mainly the latter). It also sells to customers of BT based broadband to benefit from the higher speeds. Global Services and BT Wholesale. BT Business Direct, BT Expedite We are the largest business broadband provider in the UK, with over and BT Tikit have their own direct sales functions. a third of the market for businesses with one or more employees (ie excluding sole traders who mostly buy from consumer providers). Markets and customers There are 5.2m businesses in the UK with up to 1,000 employees Networking (the main market addressed by BT Business). This is higher than last We are the leading provider of fixed networking services in the UK year, mainly reflecting growth in the number of small companies with around a quarter of the market. The overall market continues and sole traders. Excluding sole traders (many of whom buy from to grow but the mix within it is changing. Ethernet and dedicated consumer-focused suppliers such as BT Consumer), there are 1.3m internet access services are growing most strongly, while the market businesses. for leased lines continues to decline.

The types of services that companies buy from us depend on their Mobility size, number of locations, maturity and the industry in which they This market is growing in importance for us. Customers increasingly operate. Small businesses typically buy fixed-lines, mobile and want to bring their fixed and mobile services together for more broadband. Larger customers buy a broader range of products and flexible ways of working. Around 70% of SMEs use both fixed and services from our portfolio, which is the widest on offer in the UK. mobile services. We have around 900,000 customers including more than half of The part of the mobility market that we target is worth around FTSE350 companies. Major customers include: £7.2bn. We have just a 1% share of this. This small share gives us a • retailers like Fat Face, WHSmith and Pets at Home; sizeable opportunity for growth. • charities like Barnardo’s and Oxfam; The overall business mobile market continues to grow, driven by • service organisations like glh Hotels and Odeon Cinemas; sales of tablets and 4G smartphones. Market revenue from the • financial organisations like International Currency Exchange; sale of voice and data services is fairly flat. Small but growing and areas include mobile device management solutions (for companies • educational institutions like University College London. to manage their mobile estate), applications that let companies We are focused on three main markets: fixed-voice and data; give employees mobile access to their enterprise systems, and mobility; and IT services. We expect these markets to increasingly communication between networked-devices (machine-to-machine) converge over the next few years as technology and customer needs such as cash machines and vending machines. change. Our main competitors are O2 and Vodafone. They offer fixed products as well as mobile and are increasingly targeting Fixed-voice and data opportunities for converged services. The proposed acquisition of The fixed-voice and data market for businesses with up to 1,000 a EE will allow us to accelerate the sale of converged fixed-mobile employees is worth around £4.0bn. Our share is around 30% . services to business customers and offer new services, using both We compete against more than 300 resellers and fixed network companies’ product portfolios, skills and networks. operators. Our main competitors are Alternative Networks, Azzurri, Colt Group, Daisy Group, KCOM Group, TalkTalk, Virgin Media, IT services Vodafone and XLN. The IT services market is very diverse, ranging from off-the-shelf a This is lower than we reported last year because we now include a broader definition of unified hardware sales to large outsourced solutions. Competition is communications services in the total market size and we exclude revenue from customers with more than 1,000 employees in our market share calculations. fragmented with providers often focusing on specific customer- types, industry sectors or technologies. Our main competitors are Computacenter, Dimension Data, Kelway, Logicalis, Phoenix, SCC and Softcat.

802639 BT Group PLC.indb 33 5/19/2015 1:07:19 AM 34 BT plc Annual Report & Form 20-F 2015

We focus on those products and services which best fit our IT services capabilities or have the potential to drive cross-selling opportunities. Our specialist IT services offer design, delivery, management and We typically target businesses with 250 to 5,000 employees. For support, and are built around seven key portfolio practices: the larger ones, BT Global Services sometimes sells our IT services on our behalf. Professional and consulting services We estimate that the parts of the market we serve are worth around £8.4bn, of which we have around 6% share. Those areas End-user computing of the market that are growing include cloud services, hosting, infrastructure and security. We see these as attractive opportunities Unified communications and collaborations for us to grow our share of the overall market. Security Products and services We offer a wide choice of fixed, mobile and IT services. These range from standalone products to managed services and customised Networking solutions in order to suit the needs of customers from small start-ups to large enterprises. Data centre, cloud and hosted solutions

Fixed-voice services Managed and support services Our fixed-voice services range from standard calls and lines, to fully- managed office phone systems and contact centre solutions. This year we launched BT Cloud Voice and BT Cloud Phone to add to our These services are supported by partnerships with vendors such as growing portfolio of VoIP services. Cisco, HP and Microsoft.

• BT Cloud Voice provides cloud-based unified communications Mobility capabilities (such as call-routing, conferencing, call-recording, We sell mobile voice and data services through a mobile virtual online management and mobile and desktop applications) network operator (MVNO) agreement. We offer a range of handsets delivered over a BT internet connection. and tablets and a choice of tariffs to suit different customer • BT Cloud Phone is also a hosted communications service segments. delivered over a BT internet connection, but it is tailored for those smaller SMEs with simpler needs, delivered through This year we relaunched BT Business Mobile, adding 4G access and an easy-to-use suite of portals and mobile and desktop unlimited wi-fi for all new and re-signing customers. We launched BT applications. One Phone and we added the Apple iPhone to our range of handsets.

Broadband and internet BT One Phone We provide a range of internet access options including BT Business This year we launched a number of innovative products aimed at Broadband (over copper connections), BT Business Infinity over small and medium-sized enterprises in the UK. fibre-to-the-cabinet (FTTC) and fibre-to-the-premises (FTTP) and One of these products is BT One Phone. It brings together all of BTnet dedicated internet access. a company’s office phone system and mobile phone needs into a single service, hosted in the cloud and delivered on a mobile phone. We refreshed our broadband portfolio this year, introducing three simplified pricing tiers for BT Business Broadband and BT Business All of an individual’s numbers are linked to their work mobile Infinity. For the latter we launched the Business Hub 5, which uses phone, so whether somebody calls their fixed-line, extension or mobile number, all calls go to one phone. This helps businesses be the latest wireless technology to deliver faster wi-fi. We now include more responsive to their customers and less likely to miss calls. Microsoft Office 365 for free with higher-tier broadband options. As the system is cloud-based, all the feature-rich call management Networking services services of a phone system (such as call forwarding and hunt Our voice and data networking services support customers who need groups), which are typically available on a desk phone, are now to connect more than one site. Products include Ethernet, IP Virtual available on an employee’s mobile, wherever they are. Private Network services (which connect sites using IP connections), BT One Phone works with a full range of mobile phones. Combined SIP trunking (which transports voice calls over IP networks), leased with 4G and unlimited access to over 5m BT Wi-fi hotspots, lines, cabling infrastructure and local area networking solutions. our customers’ employees now have both the data and voice This year we launched an integrated proposition that offers BTnet connectivity to be as productive outside the office as they are at dedicated internet access together with a managed firewall. their desk.

802639 BT Group PLC.indb 34 5/19/2015 1:07:19 AM The Strategic Report 35 Our lines of business

Performance in the year Deliver superior customer service Underlying revenue excluding transit was down 1% due to lower line We have made progress on the plans we outlined last year to become and call volumes. But we have increased EBITDA for the third year the market leader for customer service. We have improved service running through our continued focus on cost transformation. Our through a range of group-led programmes and specific BT Business fibre broadband base has increased 61% and we have launched a initiatives. We have: new range of IP voice products. And we have improved our customer • moved more customers onto our new ‘UK Business Solution’ service. system. This brings all the core products and services that we Operating performance sell in large volumes onto a single system, making it easier to Our order intake of £2.1bn was broadly level. We achieved a number serve customers who buy multiple products from us; of customer wins and re-signs this year including: • created a new dedicated team and improved processes to help businesses when they move premises; Customer Contract • invested in 35,000 hours of training to improve the skills of our service teams; and Leigh Academies Trust Providing the parents of learners, • improved our online ‘self-service’ capabilities for customers (UK SME) across 11 schools in the Trust, the who prefer to deal this way with any issues they encounter. opportunity to purchase tablets or laptops in school and at home via a We have improved the percentage of faults repaired within target dedicated parental engagement portal. timescales by 5%, weighted across all products. We have introduced new messaging to ensure customers are aware of and are ready for Morgan Sindall Group A new three-year IT Managed Service their appointment, which has helped reduce the number of missed (UK Corporate) contract to support all of the Morgan appointments for installations. And we have improved our process Sindall Group companies. for providing Ethernet services, but we still need to do better on this.

National Trust Telephony and networking services Complaints are down 11%. Our transactional customer net (UK Corporate) plus public wi-fi services in their promoter score measured from customer feedback has increased historic sites. 7.5 percentage points and satisfaction with our advisers has increased 3.5 percentage points. Kerry Group Contract for a global SIP voice solution. Our Right First Time measure was up 5.1% (2013/14: 1.5%) driven (BT Ireland) by faster repair and provision times and 4.4% more customer calls NI Direct To deliver a contact centre for the resolved at the first point of contact. (Northern Ireland) Northern Ireland public sector and to drive digital transformation in the Transform our costs provision of government services in Operating costs were down 5%. Underlying operating costs Northern Ireland. excluding transit were down 4% due to savings from our cost transformation activities. The main reason for the lower costs is a Go Outdoors Rollout of a full retail technology 10% reduction in our total labour resource. Some of this resulted (BT Expedite) solution to all 52 stores and 350 tills to from the creation of BT Business last year, with benefits flowing replace the customer’s current estate. through to this year. We have also reduced our headcount through specific initiatives. The number of business lines we provide reduced 7% as customers For example we have reduced the number of operational sites continue to migrate to VoIP. But the net line loss in the year slowed, across BT Business. And we merged BT iNet and BT Engage IT which down 14%. But the number of IP lines we provide has increased eliminated some duplicated activities. 26% and take-up of our new BT Cloud Voice and BT Cloud Phone services is growing. We have also continued to make savings by renegotiating supplier contracts. New broadband pricing and a free Business Hub with BT Business Infinity, have helped drive fibre sales and encouraged customers Invest for growth to migrate from copper to fibre broadband for higher speeds. Our We have continued to invest in our product portfolio, with VoIP a key business fibre broadband base has increased by 61%. focus for us. BT One Phone, BT Cloud Voice and BT Cloud Phone were In Northern Ireland we have now passed 91% of premises with fibre all launched in the year. broadband and at 25%, take-up is the highest of any major region BT Tikit launched Carpe Diem Mobile, a mobile time-recording in the UK. application aimed at the legal profession. Our mobile customer base has decreased 6% (2013/14: 3%). In Northern Ireland, we have completed the first three phases of the During the year we started migrating customers from Vodafone’s DETI-funded Northern Ireland Broadband Improvement Project. network to EE after we changed MVNO provider. This resulted in We are continuing to invest further. We have improved the speed, some additional churn and we were also less focused on acquiring reach and quality of broadband services in many rural areas by new customers during this process. But we are now starting to drive investing in both copper and fibre infrastructure. In the Republic of sales of BT One Phone following its launch this year. Ireland, we have continued to invest in network infrastructure for business and wholesale customers, including national fibre backhaul and cloud services. We have replaced a large number of vehicles in BT Fleet. This will improve reliability, reduce maintenance costs and deliver greater fuel efficiency. We have also purchased a number of more environmentally-friendly electric vehicles, mainly to support Openreach.

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We have invested in improving our internal IT systems. The largest • improving our managed services capabilities to help us win investment was in our ‘UK Business Solution’ system mentioned more major deals; and above. We will continue to invest in it next year and migrate more • transforming customer service to give customers a better customers and products onto it. experience and differentiate ourselves from competitors.

Financial performance BT Consumer 2015 2014a 2013a Year ended 31 March £m £m £m We are the largest provider of consumer fixed-voice and broadband services in the UK. We are focused on top and bottom-line growth Revenue 3,145 3,213 3,220 through selling broadband, TV, sport channels and mobile services to – Underlying revenue excluding transit (1)% (1)% (2)% our customers. Operating costs 2,104 2,211 2,280 EBITDA 1,041 1,002 940 We supply BT-branded services directly to UK homes. We also sell Depreciation and amortisation 180 197 233 devices like telephones, baby monitors and set-top boxes through third-party high street retailers. Commercial premises, such as pubs Operating profit 861 805 707 and hotels, can buy BT Sport and BT Wi-fi from us too. Capital expenditure 187 127 142 Operating cash flow 874 799 816 We also sell services through our Plusnet brand. This helps us grow a our market share across the UK by addressing more price-conscious Restated, see notes 1 and 4 to the consolidated financial statements. fixed-voice and broadband consumers. Revenue declined 2% (2013/14: flat) including a £24m negative Markets and customers impact from foreign exchange movements arising from our business There are around 26m households and around 64m people in the in the Republic of Ireland. Underlying revenue excluding transit UK. Our products are available to almost all of them. The market is decreased 1% (2013/14: 1%). very competitive, with over 12 major bundled product suppliers, UK SME & Corporate voice revenue declined 5% (2013/14: 2%). 113 fixed-line operators, four major TV providers and four mobile This reflects the ongoing reduction in business call and line volumes, network operators. Our main competitors for fixed-line, broadband as customers move to data and VoIP services. We have responded to and TV services are Sky, Virgin Media and TalkTalk. this shift through the launch of BT One Phone, BT Cloud Voice and BT Cloud Phone this year. Fixed-lines The number of fixed residential lines in the UK increased by 524,000 UK SME & Corporate data and networking revenue increased 2% in the year to December 2014, to 25.5m, as more people took (2013/14: 1%), with continued growth in our networking products fixed-lines to get broadband. Our share of the consumer market for including fibre broadband. fixed-lines is 38%, the same as last year. BT Ireland underlying revenue excluding transit increased 2% Residential fixed-line call volumes in the UK fell by 13% in 2014, as (2013/14: 1%) driven by software sales and fibre broadband. more people used mobiles, VoIP, instant messaging and social media IT services revenue declined 1% (2013/14: up 8%) with a decrease to keep in touch. in lower margin hardware sales as we continue to focus our strategy Broadband towards providing higher-margin managed services. There were around 24m DSL, fibre and cable broadband connections Operating costs decreased 5% (2013/14: 3%). Underlying to homes and small businesses in the UK, as at 31 March 2015. operating costs excluding transit decreased 4% (2013/14: 4%) This is up 4% from last year. We have a 32% share of the fixed reflecting the impact of our cost transformation programmes. broadband market. EBITDA increased 4% (2013/14: 7%). Excluding foreign exchange Average broadband download speeds have continued to get faster, movements, underlying EBITDA was also up 4% (2013/14: 6%). reaching 22.8Mbps in November 2014. This is 28% above a year Depreciation and amortisation decreased 9% (2013/14: 15%) as a earlier. Demand for superfast broadband continues to grow as more result of lower capital expenditure in recent years. Operating profit people consume media online through over-the-top services such increased 7% (2013/14: 14%). as Netflix, ITV Player and BBC iPlayer. 59% of UK adults used video Capital expenditure increased by £60m (2013/14: £15m decrease) streaming services in 2014. And 32% of all broadband connections as we replaced a number of BT Fleet vehicles to support Openreach. in the UK are now superfast. Operating cashflow was an inflow of £874m (2013/14: £799m). TV This was higher than last year driven by the growth in EBITDA and The pay-TV market has continued to grow. 61% of UK households the timing of working capital movements which offset the higher take a pay-TV service, compared with 58% a year earlier, while capital expenditure. 34% watch only free-to-air digital TV (Freeview). Live channels (as opposed to catch-up or on-demand) are still the most popular way Key priorities for people to watch television. Our future plans include: People can take pay-TV services over: • developing our portfolio to add new converged services, enhancements to our VoIP products and more IT service • satellite (Sky); capabilities; • cable (Virgin Media); or • driving sales of hosted VoIP, converged fixed-mobile services • DSL or fibre (mainly BT and TalkTalk), with their TV service and fibre broadband services to attract new customers and provided over both broadband and Freeview. reduce losses to competitors; People can also take services from online or over-the-top content • developing more bundles and integrated solutions to increase providers, such as Netflix and Amazon Prime, although these cross-selling, helped by improvements in our systems and sales services typically do not offer live channels. organisations;

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For many years Sky has had exclusivity over much of the UK’s • BT Wi-fi, offering free and unlimited access to more than 5m premium content. We continue to pursue commercial, legal and wi-fi hotspots in the UK and 7m abroad; regulatory avenues to obtain access to Sky’s sport channels on a fair • BT Cloud, providing secure online storage and on-the-go access basis, to increase competition and consumer choice. to data and photos; and • BT Family Protection, BT NetProtect Plus and BT Parental Mobile Controls, to help keep our customers and their families safe Around 95% of households in the UK have mobile phones, and 16% online. of households are mobile-only. Of the more than 83m active mobile subscriptions in the UK, an increasing number are post-pay and In August 2014, we introduced a broadband package specifically for make up 59% of the total. Three out of four adults in the UK use a BT Basic customers, providing them with low-cost internet access. smartphone, and nearly half of mobile owners also have a tablet. TV While SMS/MMS volumes have continued to decline, over 137bn Our TV business consists of our TV service (BT TV) and our live sports minutes of outgoing calls were made on mobiles in 2014, up 2% channels (BT Sport). from the year before. More people are also using their mobiles to surf the web, listen to radio and watch TV. BT TV BT TV is available exclusively to our broadband customers. It brings Products and services together free-to-air channels, extra paid-for channels, BT Sport, We sell four types of product: fixed-voice, broadband, TV and Netflix, catch-up content and on-demand TV shows and movies. mobile. We win and keep customers by offering differentiated Customers with BT TV can watch standard definition (SD) and high packages. And we have a range of ‘add-ons’ customers can choose definition (HD) channels. They can also use the programme guide from, offering flexibility and extra value for money. to scroll back seven days for easy access to catch-up TV from BBC iPlayer, ITV Player, All 4 (formerly 4oD) and Demand 5. Fixed-voice We provide a range of fixed-line products and calling plans. Our Customers can choose from the following BT TV viewing packs: customers can choose from different options and ways to pay, • TV Starter. This is our entry-level offering. With our YouView depending on what suits them best. For example: box, customers can pause and rewind live TV and receive up to • Line Rental Saver gives customers a discount on their line 70 Freeview TV and radio channels. rental if they pay for a year upfront; • TV Essential. This provides everything that comes with

• Line Rental Plus comes with priority phone line fault fixes, Call TV Starter, but with our YouView+ box instead which can Barring and Choose to Refuse, and gives customers the choice record up to 300 hours of live TV. of paying bills when they arrive instead of by Direct Debit; • TV Entertainment. This is made up of TV Essential plus 20 extra • Home Phone Saver offers line rental, inclusive calls and extra channels not available on Freeview (such as Comedy Central, calling features in one simple package at a discounted price that Discovery and Gold). It is only available to BT Infinity customers. is guaranteed until 2017; BT TV customers can add extra channel packs such as ‘Kids Extra’ • BT Basic offers discounted line rental and inclusive calls to those (which also includes on-demand content), BT Sport, Sky Sports on low incomes and in receipt of certain state benefits (such as 1 and 2, and Sky Movies. We also offer on-demand only content, income support). We are the only company to offer a service like including Netflix, Curzon Home Cinema, ‘Music’ and ‘Kids’. this; Customers can also rent or buy other TV shows and films. • Right Plan is a free service our customers can use to find out whether they are on the right calling plan for the kinds of calls BT Sport they make; and Our live sports channels, BT Sport 1, BT Sport 2 and ESPN are • BT SmartTalk is a free app that allows our customers to use available in both SD and HD. BT Sport is broadcast on BT TV, the their home calling plan on a range of mobile devices. For BT Sport app, the btsport.com website and the Sky Digital Satellite example, they can use it to make inclusive or low-cost calls Platform. The channels are also available through wholesale when overseas. Calls appear on their BT bills as if they had been agreements to Virgin Media customers, and in the Republic of made from their fixed-line. Ireland with Setanta. Our unlimited call packages let customers choose from inclusive BT Sport is free for customers who renew or take out a new BT evening, weekend or anytime calls to fixed-lines, and discounted broadband contract. Customers who are out of contract can get the calls to mobiles. channels for half price. Sky TV customers without BT broadband can subscribe to the SD or HD channels for full price. We offer products and services that help our customers avoid nuisance calls. Our BT8500 phone uses award-winning technology BT Mobile to help customers block unwanted calls. We also offer calling BT Mobile offers SIM-only plans to UK consumers. Anyone who lives features such as Caller Display, Anonymous Call Reject and Choose to in a home with BT Broadband can get the best price on BT Mobile. Refuse. Customers can choose from one of three plans, with different Broadband combinations of data and minutes to suit their needs. With We are the UK’s largest broadband provider. BT Broadband, our customers able to take up to five SIMs per account, BT Mobile is a DSL service, is delivered over copper lines. BT Infinity, our superfast convenient option for families wanting to consolidate their mobile broadband service, uses fibre to deliver enhanced speed and services with one provider and to add attractively priced 4G services. performance. All our mobile plans come with 4G, unlimited texts, and unlimited To suit our customers’ diverse needs and interests, we offer a range access to BT Wi-fi hotspots in the UK and to the BT Sport app, at no of broadband options, with different usage limits and speeds. These extra cost. Customers can use the BT Mobile app to monitor their are usually bundled with fixed-voice call plans and typically come account. with free or discounted add-ons, like: • BT Sport, providing premium sports content;

802639 BT Group PLC.indb 37 5/19/2015 1:07:19 AM 38 BT plc Annual Report & Form 20-F 2015

Mobile is a key strategic focus for us, and we will continue to build Deliver superior customer service our mobile offering in the coming years. We are delivering on the commitments we made in last year’s annual report. We hired hundreds of new contact centre staff. We are FA Premier League football broadcast rights improving our processes so that a single adviser can more efficiently The auction for the 2016/17 to 2018/19 FA Premier League broadcast diagnose a problem and make sure it gets fixed. We are introducing rights took place in February 2015. dedicated case management for complex issues. And we were able We were very pleased with the rights that we won. We will be showing to resolve 20% more customer issues in a single call. 42 Premier League matches in each season, four more than we currently These improvements contributed to our Right First Time show. performance increasing 1.9% this year (2013/14: 5.4%). This The new rights will see BT Sport show a live Saturday evening game improvement was despite a different mix of products sold, which almost every Premier League weekend. This will allow us to build on our impacted our average speed of delivery compared with last year. current Saturday programming and appeal to an even larger audience, having secured the prime evening TV viewing slot. Ofcom’s latest UK fixed-line broadband performance report shows These new Premier League games will be added to the 350 exclusive live BT Broadband’s overall performance was better than Sky and matches from the UEFA Champions League and UEFA Europa League TalkTalk. However, our copper customers’ relative perceptions of that BT Sport will show from both tournaments, for three seasons speed were affected by the increased promotion of fibre broadband starting in the summer of 2015. We also have live rights to the FA Cup in the market. Increasingly aggressive pricing by competitors also for the next three years. affected customers’ perceptions of value for money, contributing to BT Sport currently shows around 50 live matches each season featuring a decline in our overall customer advocacy score to 34% at the end Premier League clubs. We expect this to more than double to around of Q4 (Q4 2013/14: 39%). 115 from the 2015/16 season onwards when all competitions featuring Premier League clubs are taken into account. Our strategy to have more of our customers taking fibre, TV and mobile services from us is reinforced by the customer advocacy when they do. BT Infinity has had a positive effect on loyalty with lower Performance in the year churn relative to copper broadband. Customers with BT Infinity Our revenue grew 7%, reflecting the growth in our broadband and BT and BT TV are more than twice as likely to recommend us than our Sport customer bases, while EBITDA increased 24%. We grew our share of the DSL and fibre broadband market for the sixth year in a row and customers who take only fixed-line and copper broadband. And we have added the most broadband customers of any operator for six customers with BT Sport are around 60% more likely to recommend quarters running. We are delivering on our commitment to improve us than those without. customer service and continue to invest in this area. We are continuing to invest in our customer service capabilities, Operating performance systems and processes, with key investments in: At 31 March 2015 we had around 9.6m consumer fixed-lines • insight, to help make sure we can see the customer’s full (2013/14: 9.9m), with around 9.4m active voice lines (where a experience and work to improve it; customer buys calls from us as well as paying for the line). Our total • online and new mobile/tablet apps (such as BT Mobile), so we number of fixed-line customers is down 275,000 from last year can serve more customers through their channel of choice; (2013/14: 314,000). We lost 203,000 net active lines, compared • better diagnostics, to help us detect and resolve faults with 196,000 last year. proactively and more quickly; We achieved 432,000 broadband net additions this year, 51% of • UK support, so we can answer more calls in the UK, supporting the DSL and fibre broadband market net additions. This took our local jobs across the country; and overall market share to 40%, up from 39% a year ago. • empowering our people to support our customers, by investing in better training and job redesign, better aligning We have continued to grow our fibre base, and now have 3m fibre skilled people to customer needs. customers (including business lines), a 43% increase from last year. 39% of our retail broadband customers are now on fibre, compared Transform our costs with 29% last year. Operating costs increased 2% reflecting the first full financial year of BT Sport programme rights charges. We achieved 140,000 BT TV net additions and now have 1.14m BT TV customers. And 3.3m households have access to BT Sport, This year, we particularly focused on: a number that rises to 5.2m when wholesale deals are taken into • reducing the number of engineer visits to install fibre account. We are the biggest supplier of sport channels to UK pubs. broadband for our customers, by launching our self-install More than 25,000 commercial premises, including 30% of all UK proposition; pubs, have access to BT Sport. • continued efficiencies across our sales, service and commercial BT Sport’s average daily audience figures increased 15% year on functions; and year, from the start of the football season in August to the end of • launching a lower-cost BT TV set-top box without a Personal March. More than half the FA Premier League matches we showed Video Recorder (PVR). this season reached over 1m viewers. Invest for growth Our ARPU this year was £415, up £24 from last year, driven mainly In March we moved back into the consumer mobile market with the by take-up of fibre broadband, upselling of BT TV and changes in our launch of BT Mobile using our MVNO agreement with EE. pricing.

802639 BT Group PLC.indb 38 5/19/2015 1:07:19 AM The Strategic Report 39 Our lines of business

BT Group plc’s proposed acquisition of EE will bring together the EBITDA increased 24% (2013/14: 14% decrease). Depreciation UK’s most advanced 4G network and most extensive superfast and amortisation was flat (2013/14: 12% down), leading to an broadband network. This will help create the UK’s leading converged operating profit increase of 32% (2013/14: 15% decrease). communications provider and allow us to provide a full range of Capital expenditure was down 2% (2013/14: 12%) and operating innovative communications services to both EE and BT customers. cash flow increased 72% (2013/14: 28% decrease) mainly We have continued to invest in our BT TV platform and content, reflecting the stronger EBITDA and last year’s deposit of around including BT Sport, reflecting the importance of providing high £60m for the UEFA broadcast rights. quality bundled offerings that appeal to a wide customer base. We have strengthened our content and channel distribution deals and Key priorities built new capabilities that mean our customers can watch in ways Over the coming year we plan to broaden and deepen our customer that best suit them. relationships by: • In November, we introduced Netflix on BT TV. Customers can • driving BT Infinity and BT TV deeper into our customer base; subscribe to Netflix directly with BT and pay for it alongside • increasing penetration of BT Mobile amongst our customers; their other BT products, on a single BT bill. • launching our exclusively live UEFA Champions League coverage • We have redesigned the look and feel of our TV service, and on BT Sport; and launched two new set-top boxes, for a more responsive, better • driving improvements in customer service. viewing experience. BT Wholesale • We have made it easier for our customers to watch what they BT Wholesale provides services in Great Britain to more than 1,400 want, when they want, around the home and on-the-go. BT CPs. Each one has its own ambitions, strategy and strengths. Our TV customers with BT Infinity can get a second YouView box role is to help them achieve their goals by offering them innovative, with an Extra Box subscription. In addition, films and TV shows reliable and cost-effective products and services that complement purchased on our set-top boxes are now automatically available their own capabilities. This means that we can share in their success. for customers on their smartphone, tablet or PC, at no extra cost. And with our new TV Everywhere service, customers can We are organised around our main customer groups: watch a selection of channels on up to two devices at the same time. • Fixed network service providers. • In December we launched Sky Sports 1 and 2 on YouView, • International call providers, Media & Broadcast, Network adding to our existing offering of BT Sport, ESPN and operators, Resellers. Eurosport. In February, we won rights to show even more FA • Mobile network service providers. Premier League matches, as discussed on page 38. • We also extended our deal with Aviva Premiership Rugby. The We also have teams that develop and run our products and provide top flight of English club rugby will be live on BT Sport until at customer service. least the end of the 2020/21 season. We now have broadcast Outside Great Britain, BT serves CPs in Northern Ireland and the rights for up to 80 live matches each season starting from Republic of Ireland through BT Ireland and elsewhere through BT 2017/18. This is 11 matches more per season than under our Global Services. BT is Europe’s largest wholesale telecoms provider. current deal. Markets and customers Financial performance 2015 2014 2013 BT Wholesale is Great Britain’s leading provider of wholesale Year ended 31 March £m £m £m telecommunications services. We are recognised for our innovation Revenue 4,285 4,019 3,846 as well as for our scale. For example, according to Current Analysis Operating costs 3,254 3,186 2,878 (December 2014), “BT Wholesale is maintaining a firm grip on its leadership status in the UK wholesale segment with aggressive EBITDA 1,031 833 968 development of new services and a strong IPX story”. Depreciation and amortisation 218 219 248 Operating profit 813 614 720 Our customers include: broadband and TV providers such as Sky, TalkTalk and Virgin Media; the mobile operators EE, O2, Three and Capital expenditure 207 211 241 Vodafone; and other service providers such as Daisy Group, Gamma Operating cash flow 813 472 655 Telecom and KCOM Group. Major overseas operators use our services to provide solutions in Great Britain too. Revenue increased 7% (2013/14: 4%), mainly driven by broadband and TV. Customers of our Media & Broadcast unit, which operates a specialist fibre and satellite media network worldwide, include the BBC, ITV Broadband and TV revenue was up 16% (2013/14: 18%) as a result and Star TV. of a higher broadband ARPU, as customers migrated from copper to fibre products, and a full year of BT Sport revenue (BT Sport We operate in a dynamic and challenging market. The key market launched in August 2013). trends are as follows: Calls and lines revenue increased 1% (2013/14: 2% decrease) • The market for wholesale services is shrinking. This is reflecting changes to some of our prices. because some CPs are building more of their own network infrastructure, or are sharing what they already have. For Other revenue increased 6% (2013/14: 4%). This growth reflects example, Sky and TalkTalk continue to use local loop unbundling strong sales of the BT8500 phone, our most sophisticated nuisance (buying directly from Openreach) to extend their networks. call blocking phone to date. And Vodafone is expanding its own national network. The Operating costs were up 2% (2013/14: 11%) reflecting the first full impact of this trend is magnified where operators decide, as financial year of BT Sport programme rights charges. Virgin Media did this year, only to serve customers within their

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own network footprint. This means CPs need less help from us Voice to support their customers. We provide a wide range of wholesale voice products. The most • The market remains very competitive. TalkTalk, Virgin Media basic, Transit, carries calls across our network from one CP’s network and Vodafone are our biggest competitors for connectivity to another. Direct Conveyance carries calls from a CP’s network to products. Gamma Telecom competes with us for IP voice BT’s own end customers, while International Direct Dial carries calls services. While our customers value the performance and from Great Britain to end-users overseas. reliability we can provide, we continue to see price pressure CPs without their own voice network, but wanting to offer voice in the Ethernet market in particular. We expect this trend to calls, can use our Wholesale Calls product. It provides everything continue. they need, on a ‘white-label’ basis. • But the market for next-generation services is expanding. Ethernet is now the de facto choice for networks that serve IP Exchange (IPX) businesses and demand is growing. And the market for hosted All the voice products above use traditional Time Division IP voice services grew by more than 20% this year. This is a Multiplexing (TDM) technology. By contrast, CPs can use our young and exciting area and one which we expect to grow IPX platform to deliver voice calls over Internet Protocol (IP). IPX strongly next year. ensures that calls get to their destination, at the correct level of Regulation is an important part of our environment. Around two- quality, whatever the network technologies used along the way. thirds of our revenue comes from products that are regulated or BT Wholesale sells IPX in Great Britain. BT Global Services sells it have substantial regulated components. Regulatory decisions can elsewhere around the world. This year BT’s work on IPX won the have a major impact on both our short-term trading performance Queen’s Award for Innovation. and our longer-term business model. As we explain below, Ofcom’s Hosted Communications Services Narrowband Market Review had a significant effect on our financial We provide a set of IP voice, contact centre and unified results this year. communications services for CPs to offer to their business customers. Products and services It includes IP Centrex, SIP Trunking, Hosted Contact Centres and By using our portfolio, CPs can serve their customers without having Inbound Call Services. These services, which we host and manage to invest in their own assets and capabilities. We offer connectivity, end to end on CPs’ behalf, are intended to help businesses increase voice and hosted communications services, and a range of bespoke their productivity and improve their customer service while reducing managed solutions. We also offer industry-specific services to media their investment costs. companies and broadcasters. This year we launched new versions of our IP Centrex and SIP Trunking propositions. And we formed a new partnership with Broadband Avaya Inc. to sell its Avaya Cloud Solutions portfolio through systems We provide CPs with broadband connections between their network integrators and other service providers. and their customers. With Wholesale Broadband Connect, CPs can serve 92% of all premises with copper-based broadband, and more Managed solutions than three-quarters of premises with fibre broadband. Our older We combine our products with third-party components and our own broadband network brings our total copper-based coverage to over professional services to create managed solutions that solve specific 99%. customer or industry problems. For CPs without any network, our Managed Broadband option We design, plan and build transmission networks. We provide provides everything they need to offer a broadband service, white-label solutions, combining broadband, calls and lines products including internet access and IP addressing. with billing and customer support. We also provide more tactical project management services, or bespoke capabilities, to fill a Ethernet particular need. By using our expertise and economies of scale we We supply Ethernet connections between CPs’ own networks and aim to reduce customers’ deployment risk, operating cost, capital their customers. For example, this helps major overseas operators to expenditure and/or time to market. provide services wherever they need to. We can provide Wholesale Ethernet to 81% of business premises Media and Broadcast services over existing copper circuits (2013/14: 55%), and to over 99% Our media network can carry every kind of content, from live- with fibre. An increasing number of the UK’s major data centres and to-air television through to very large media production or post- telehouses are also on our network. production files. It handles all of the UK’s digital terrestrial TV (including Freeview). It also provides outside broadcast services from Customers can choose Ethernet speeds ranging from 2Mbps to more than 150 sports and news locations across the UK. 10Gbps. Those needing higher bandwidths are now able to order our Wholesale Optical product, which offers speeds of 10Gbps to Our new wireless ‘Media Live’ service means news crews can send 100Gbps and is due to be fully launched next year. live content straight from their cameras to the BT Tower for onward distribution, without needing an outside broadcast vehicle. This We supply a Managed Ethernet Access Service (MEAS) specifically for service is currently available in London and more cities will be added mobile operators to connect their cell sites to their core networks. soon. Ethernet services are gradually replacing Partial Private Circuits, a Our media network also links the main locations around the world legacy connectivity service which we also offer. where broadcast or film content is created or distributed. And, through local partnerships, it links TV stations to major sports venues worldwide.

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Performance in the year These improvements were driven by three areas of innovation in Underlying revenue excluding transit fell 7% and EBITDA fell 9%. particular: This reflects the impacts of a large contract termination, regulatory • Business Zone. We launched a self-service portal through price reductions following Ofcom’s 2013 Narrowband Market which CPs can manage their orders and any faults. Customers Review and a generally tougher trading environment. However, we who used this portal were a lot more satisfied than those who have strengthened our position for the future. Customer satisfaction did not. For those customers who prefer their systems to deal is higher and our cost base is lower. Our order book was stable and with ours directly, without human intervention, we introduced we enriched our portfolio of Hosted Communications Services. a new gateway for placing Ethernet orders; Operating performance • process improvements. We improved our repair and billing This year we signed orders worth £1.9bn (2013/14: £1.9bn). The processes, so we could answer repair calls and sort out billing biggest deal we signed was a multi-year extension to a contract to queries more quickly; and provide fixed broadband, calls and lines as a white-labelled managed • colocation. We moved our service colleagues into fewer service service. We also signed major deals to provide: centres, with a view to increasing the level of expertise available to each caller. • network planning, field engineering and co location services for a number of mobile network operators; Our service performance on Ethernet was mixed. It took us longer to • managed data solutions (incorporating leased lines and provide Wholesale Ethernet and MEAS circuits than we would have Ethernet) for a major US telecoms provider. This followed similar liked. But their in-life failure rates fell by 9% and 24% respectively. contracts with two other US-based customers last year; And greater automation enabled us to improve our response times to • broadband, Ethernet, calls and Hosted Communications the faults that did arise. Services for a major reseller; Transform our costs • IPX for two mobile network operators; Operating costs fell 12% (2013/14: 9%) or 7% excluding transit • global broadcast distribution for the BBC World Service, our (2013/14: 3%). We achieved this primarily by: new Media Live news gathering service for ITN and transmission of the ICC Cricket World Cup for Star TV in India; and • reducing selling and general administration costs which were • Hosted Communications Services to a range of CPs such as 20% lower year on year; Claranet and MainTel. We signed dozens of contracts for CPs to • improving our diagnostic tools for identifying broadband faults. resell our IP voice portfolio (IP Centrex and SIP Trunking) and This meant we did not need as much help from Openreach dozens more to resell Avaya Cloud Solutions. to understand the cause of the faults. This saved us time and money and meant we could resolve faults more quickly; We also extended our partnership contract with KCOM Group to • limiting third-party costs by rationalising our supplier base and include the management and maintenance of its fibre-to-the- renegotiating our supplier contracts; and premises network in Hull and East Yorkshire. • removing unnecessary capacity from our network. The number of Ethernet circuits we provide grew by 28%. We achieved this by improving our order-taking process, simplifying our Invest for growth pricing and expanding our network. However, we saw less demand Given the increasing price pressure in the market, we have sought from mobile operators for Ethernet services this year and it took us to stand out from the competition by providing new services and a longer to deliver new orders. We connected fewer MEAS circuits as better customer experience. This year we invested in: a result. • a broader product portfolio. We are developing new IPX carried 19bn UK-originated voice minutes, up by two-thirds on connectivity products, using optical fibre and small cell last year. While these minutes partly replace calls previously carried technologies, which we will start offering next year. We are over our non-IP network, the service is now used by almost all of adding new capabilities to IPX (including 4G and wi-fi roaming, the UK’s biggest CPs. This is testament to our ability to support our which we are now launching next year), and are extending customers in an IP world. our Hosted Communications Services portfolio. We have also started rolling out new fibre cabinets to major sports In the broadband market, the number of lines we provided on a grounds around the country, giving a low-cost option for event wholesale basis fell by 1%. This reflected some larger CPs’ preference broadcasts; to use their own networks instead of ours. But our smaller customers • our network. We have been extending our Ethernet network. bought more copper broadband from us, as they won business from This improves its unit cost as well as its availability. We intend to other wholesale providers with our help. And our fibre broadband extend that coverage even further next year; base grew by over 80%. • our media capabilities. We have carried out trials of 4K Ultra- High Definition TV for a number of broadcasters over our global Deliver superior customer service media network. One of those trials has already led to a contract This year we revised our customer satisfaction measures to align for the live 4K transmission of seven ICC Cricket World Cup them more closely with our customers’ priorities. Despite setting matches; and more stretching targets, customer satisfaction rose from 72% in the • better service. Launching Business Zone had a noticeable and first quarter to 80% in the fourth quarter. And our Right First Time immediate impact on customer satisfaction. performance was up 4.4% (2013/14: 3.3%).

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Financial performance Key priorities 2015 2014 2013 Year ended 31 March £m £m £m Our future plans include: Revenue 2,157 2,422 2,608 • launching new connectivity products, using optical fibre and – Underlying revenue excluding transit (7)% (3)% (3)% small-cell technologies; Operating costs 1,596 1,808 1,988 • further extending our Ethernet and Wholesale Broadband EBITDA 561 614 620 Connect coverage; Depreciation and amortisation 224 245 254 • offering new access options for our Mobile Ethernet Access Service; Operating profit 337 369 366 • adding new features to our Hosted Communications Services; Capital expenditure 210 244 233 • launching new IPX features; and Operating cash flow 278 372 348 • adding new capabilities to Business Zone.

Revenue fell 11% (2013/14: 7%). This included £113m or 41% Openreach less transit revenue (2013/14: £119m or 30%), as network Openreach provides the vital infrastructure that is the foundation of operators sent fewer voice calls over TDM and exchanged more of the UK’s vibrant internet economy. We are responsible for providing those calls directly rather than via our network. services over the local loop or local access network, sometimes referred to as ‘the last mile’. This consists of the copper and fibre We billed and partially collected the payments due from mobile connections between our exchanges and homes and businesses. operators following the Supreme Court judgment on ladder pricing in July 2014. As a result, we recognised around £30m of trading Openreach is firmly focused on building Britain’s connected future, revenue for this year in addition to the revenue treated as a specific playing our part in creating the infrastructure needed to underpin item relating to prior years, as explained on page 15. We expect to growth. During the year we took our fibre broadband network recognise additional trading revenue relating to ladder pricing of coverage beyond 75% of UK premises – over 22ma. around half this amount in the income statement next year. We have also extended fibre coverage to rural communities. We have Underlying revenue excluding transit was down 7% (2013/14: 3%). been working in partnership and co-investing with the Government’s This was primarily due to lower revenue from traditional calls, lines Broadband Delivery UK (BDUK) programme. Being part of a larger and circuits, including the regulatory price changes as a result of group gives Openreach the confidence in future demand to make Ofcom’s last Narrowband Market Review (NBMR). long-term investments. The NBMR greatly reduced the price that CPs can charge each other According to European Commission data, the UK has the highest to deliver calls made to their fixed-line customers. This meant we coverage of next generation access (NGA) broadband of the five had to charge less for Direct Conveyance, which (as explained earlier) largest countries in Western Europe. Coverage of 82%, including delivers other CPs’ calls to BT’s own customers. Virgin Media’s network, is above the European Union average of 62%. Broadband revenue declined 17% (2013/14: 15%) as the major retail broadband providers continued to make more use of their own We keep the UK connected through a network which links more networks instead of ours. than 5,500 exchanges, around 98,000 street cabinets (primary connection points, or PCPs) and around 4.7m distribution points. Managed solutions revenue fell 11% (2013/14: 7% growth) as Our network is used by nearly 80% of UK homes and businesses. the Post Office completed the migration of services off our white- labelled broadband, calls and lines solution. And mobile network We do not sell our products directly to the public. We work on behalf operators bought fewer new MEAS circuits, generating lower of communications providers. Our network and services are available connection revenue. Managed solutions revenue accounted for 37% to all of them, and in turn, they compete to provide phone and of total revenue, in line with last year. internet services to consumers and businesses. A recent European Union report stated that “The UK now offers the most affordable We continued to see strong growth in IP services, with revenue up broadband in Europe”. 42%. IPX and Ethernet showed double-digit growth, following continued investment in these expanding markets. We expect our We offer our main products on the same terms, to all CPs, including new Hosted Communications Services to contribute good growth in other BT lines of business, in line with our commitments under the year ahead. BT’s Undertakings (more on page 14). As a result, Openreach’s operational, engineering and systems capabilities are separate from EBITDA declined 9% (2013/14: 1%), driven by lower revenue the rest of BT. More than 99% of Openreach revenue is subject to (including the impact of the NBMR) and a changing product mix. these Undertakings. These effects were partly offset by our cost transformation activities, and the ladder pricing revenue recognised in the year. Depreciation Markets and customers and amortisation was down 9% (2013/14: 4%) and operating Openreach, along with BT Wholesale, serves wholesale telecoms profit fell 9% (2013/14: 1%). customers in Great Britain. Wholesale customers in Northern Ireland and the Republic of Ireland are served by BT Ireland. Capital expenditure was 14% below last year (2013/14: 5% higher), partly driven by lower spend on our Wholesale Broadband We have around 540 CP customers, the largest of which are Sky and Connect rollout programme. TalkTalk and other BT lines of business (particularly BT Consumer and BT Business). Operating cash flow decreased 25% (2013/14: 7% increase), largely driven by working capital movements as last year benefited We are seeing continued demand for data and bandwidth which is from the timing of customer receipts. driving growth in our products.

a This includes 790,000 premises in Northern Ireland, provided by BT Ireland.

802639 BT Group PLC.indb 42 5/19/2015 1:07:19 AM The Strategic Report 43 Our lines of business

The overall number of fixed-lines in the UK is growing, helped by product aimed at businesses. We added new features including: new homes being built, as well as the trend for customers to connect a new service level providing prioritised repair; a dedicated UK- their mobile devices to fixed broadband lines via wi-fi. based specialist helpdesk; and call diversion to an alternative number. CPs can also choose from a range of options such as Our main competitor for consumer services is Virgin Media. Its shorter appointment windows and visits by a named engineer, proprietary cable network covers around half of UK homes, although which is helpful when secure or sensitive sites are involved. it announced this year significant expansion plans to reach an • Local Loop Unbundling (LLU) gives CPs a choice of ways to additional 4m premises by 2020. invest in a broadband network. LLU involves CPs installing their We also saw other companies investing in their own fibre access own equipment in our exchanges and renting the copper line networks, reflecting the competitive nature of the market. CityFibre, to the customer premises. CPs can use our shared metallic path Hyperoptic and IFNL all expanded their footprint deploying ‘fibre facility (SMPF) product to offer broadband over a WLR line or to the building’ to address different market demands for superfast our metallic path facility (MPF) product to offer both phone and broadband. CityFibre’s joint venture project with TalkTalk and Sky broadband services using just their equipment. is at an early stage of development, but has the potential to pose a competitive threat going forward. Infrastructure • Passive Infrastructure Access (PIA) products offer all CPs The market for Ethernet and optical service products, providing access to Openreach’s basic infrastructure. For example, they business-quality connectivity, is particularly buoyant, more than can rent space in our ducts or on our telephone poles. CPs can doubling in size between 2011 and 2014. This is due to businesses’ use PIA to help them build their own fibre networks instead of need for greater speeds, capacity and reliability, and also the buying fibre broadband services directly from us. migration from old style private circuits. • Mobile Infill Infrastructure Solution (MiiS) enables MNOs Our many competitors in the business market include Virgin Media, to improve localised mobile coverage. We install antennas on Colt Group and Vodafone. Pricing, service delivery and product selected telephone poles linked to a special street cabinet to innovation have been the key competitive themes over the past year. which we provide power and backhaul. Mobile operators can The ‘price per Gbit’ is being driven down by intense competition, then install their radio equipment and use their spectrum to particularly in metro areas. Buoyant market demand for Ethernet has help reduce mobile signal black spots. placed pressure on the delivery of circuits for all those competing in We also offer specialist products to connect CPs’ networks to our this market. exchanges.

Products and services Ethernet We offer four principal products and services: fibre broadband, Our Ethernet products offer dedicated fibre connections with speeds copper-based services, infrastructure and Ethernet. of up to 100Gbps. CPs use them in their own networks and to provide high-quality, high-bandwidth services to businesses and the Fibre broadband public sector. Our wholesale fibre broadband product is called Generic Ethernet Access. We offer a number of different fibre services: During the year we launched a number of new products which are available nationwide and offer flexible pricing and routing options. • Fibre-to-the-Cabinet (FTTC) takes fibre from the exchange to the street cabinet and uses the existing copper network Performance in the year for the final link to the customer. It provides speeds of up to We have expanded our superfast fibre broadband network, making 80Mbps and has proved to be a highly effective way of rolling it available to a further 3m premises. We began testing G.fast out superfast broadband at scale and pace. When CPs connect technology which will be able to provide ultrafast broadband speeds. a new customer, they can either choose to have an Openreach We achieved all the minimum service levels set by Ofcom, though engineer visit a home or business site or use a ‘self-install’ our ambition and plans are to further improve customer service. To option. FTTC is our most widely-used service. help us do this, we hired more than 2,500 new engineers. Revenue • Fibre-to-the-Premises (FTTP) provides faster speeds of up declined 1% and EBITDA was flat with regulatory price reductions to 330Mbps. This is achieved by laying fibre all the way to the offsetting the impact of broadband revenue growth. customer premises. CPs can offer voice services over FTTP which are similar in functionality to copper-based voice services. Operating performance • FTTP-on-Demand lets end customers in areas served by FTTC The UK DSL and fibre broadband market grew by 851,000 and the obtain an FTTP connection if they are prepared to pay for the number of Ethernet services we provide grew 3% in the year. cost of installation. This is in the process of being rolled out and We have now passed more than 22m premises with our fibre is currently available to nearly 9m premises. broadband network, over three-quarters of the UK and ahead of our original schedule. Our fibre broadband network can carry broadcast and on-demand internet protocol television (IPTV) services. We provide a multicast We achieved 1.5m fibre broadband net connections in the year. This service which cuts the cost of delivering broadcast TV over our means that around 4.2m homes and businesses in the UK are now network and means CPs can choose to prioritise TV over other web connected, 19% of those passed. Of the net additions in the year, traffic. 40% were provided to our external CP customers, an increase from 31% last year, demonstrating the market-wide demand for fibre. Copper-based services • Wholesale Line Rental (WLR) lets CPs offer own-brand Under the BDUK programme we are co-investing alongside public phone services (with their own pricing and billing) using our funding to bring fibre broadband to rural communities. We cannot equipment and network. They pay to use the copper lines use this funding in urban areas as there are a number of EU state-aid between our exchanges and the customer premises but rules that restrict the group’s ability to use funding for superfast do not need to invest in their own network equipment or services in cities. infrastructure. During the year we improved our premium WLR

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We are also bidding for further contracts, known as the Superfast Openreach performance against service responsibilities Extension Programme (SEP). This aims to make superfast broadband available to 95% of the country. Q4 Q4 Deliver superior customer service Movement 2014/15 2013/14 Openreach serves end customers on behalf of CPs, managing Home and work users installations and repairs for their consumer and business customers. New lines installed on time 92.98% 93.11% As the internet becomes an increasingly important part of daily life, customer demand for our products continues to rise, as do customer expectations of our service performance. Average time to install with an 13.46 16.87 engineer (working days) Over the last 12 months we have hired more than 2,500 engineers, including over 300 apprentices, to help us deliver improved levels of Average time to install without 9.77 9.44 an engineer (working days) service. In February 2015 we changed the way we are organised so that Installation requiring an 0.00% 11.96% engineer where wait is 22 days we are better aligned with our customers. While field engineers will or longer for appointment continue to be based close to customers, our dispersed office-based support roles will be transferred to regional Centres of Excellence, Average time for first available 6.70 11.18 with our people equipped with better tools, systems and career appointment date for new opportunities. installation (working days) We are providing more information on our service and New lines requiring an 1.23% 0.66% performance, to both our CP customers and their end customers. engineer visit not installed We have launched a website where CP customers can see detailed after 31 days past target date performance information for each UK region. We have also Average time to fix faults 2.67 2.78 introduced an incident checker to help consumers identify problems Maintenance level 1 with our network in their area. And we have upgraded our fibre (working days) broadband website so that people can see when fibre is coming to their area. Average time to fix faults 1.79 2.12 Maintenance level 2 The table to the right shows Openreach’s service performance, on (working days) a number of key measures. We publish this data, with additional Faults fixed within agreed time 75.10% 67.78% levels of detail, on a quarterly basis, as part of our move towards Maintenance level 1 greater transparency and visibility. It can be found here www.homeandwork.openreach.co.uk/our-responsibilities Faults fixed within agreed time 75.66% 64.63% Maintenance level 2 To help us improve further, we launched a new customer survey in December, gathering data from some of our largest CPs. The Faults not cleared after 0.86% 0.46% survey is designed to gauge end-customer perception about 31 days or more Maintenance their experience of an Openreach engineer’s installation or repair level 1 visit. This will help us better understand what opportunities for Faults not cleared after 0.84% 0.49% improvement exist. 31 days or more Maintenance We are making significant progress. We have improved our response level 2 times, fixing faults on average 14% faster than last year. Despite rising demand for our services, we improved our installation lead- Business users times for copper services by four days. We have reduced the number Average time to install on-net 33.49 40.37 of complaints by 25% and reduced the number of appointments services (working days) missed by our engineers by 28%. Average time to install 69.95 68.74 During the year we exceeded all of the 60 new minimum service where new build is required levels for copper products (for the installation of new lines and (working days) repairs to existing services) introduced by Ofcom. They become more stretching in 2015/16. Faults fixed within agreed time 92.79% 96.21% (percentage) Our focus on service helped us manage volatility in demand. Thanks to improved planning, work allocation, resource deployment and Note: this compares performance in the quarter and is not an annual measure. increased capacity as a result of our recruitment programme, we were able to deal with more repairs and deliver a better level of service to our customers. Improvement Steady performance – maintaining focus We were also better able to cope with extreme weather conditions, including severe storms in the South West and Wales in October and Further improvement needed – plans in place to get back on track ‘Storm Rachel’, which particularly affected Scotland. On our key customer service measure of Right First Time, we exceeded our target by improving 3.5% (2013/14: down 1.9%).

02c_802639_Report of the Directors_Strategy_p29-46.indd 44 5/19/2015 5:31:43 AM The Strategic Report 45 Our lines of business

Although we made progress on improving our service this year, we recognise that there is still more we need to do. For example, we Ultrafast broadband vision have been unable to install lines on new sites as fast as we would In January 2015 we set out our ultrafast broadband vision for have liked. We are now working with house builders and developers the UK. to make sure that our processes are as good as they can be and that Using G.fast technology, we expect to offer initial speeds people can get our service in their new homes promptly. of a few hundred megabits per second to millions of homes We are not satisfied with how quickly and reliably we provide and businesses by 2020. Speeds are expected to increase new Ethernet circuits, but we are pleased with our performance to up to 500Mbps to most of the UK within a decade from on repairing them. We are hiring more people to help us improve now, as further industry standards are secured and new kit is this. We are also working with our CP customers on a new process developed, subject to there continuing to be a stable regulatory which recognises that different customers have different needs. For environment that supports investment. We also plan to offer a example, some prioritise certainty of delivery timing, others care 1Gbps product for those that want ever faster speeds. more about speed of provision. G.fast is an innovative technology that uses higher frequencies than FTTC to provide faster broadband speeds over copper. We Transform our costs will test it in two trial locations (Huntingdon, Cambridgeshire Operating costs reduced 2% (2013/14: 1%) as cost efficiencies and Gosforth, Newcastle) this summer. offset an increase in volumes, pay inflation and the additional engineering resource we recruited. The trials will build on tests at our innovation centre at Adastral Park. These have shown that G.fast has the potential to deliver We have increased our efficiencyby proactive investment in process significant speed increases from existing and new fibre street improvements and new systems and tools that will reduce the cabinets as well as from other points closer to the customer. number of engineering jobs and unnecessary customer contacts. We This is an important development as it means the technology have recruited additional engineers using new terms and conditions can be deployed in a more efficient and rapid manner than which offer greater operational flexibility. Where possible we have previously thought. also progressed insourcing activities. If the trials are successful, we will start to deploy G.fast across This year we: the network in the 2016/17 financial year. • created innovative apps that improve engineer efficiency and have a direct impact on our costs. These apps also give us better Financial performance 2015 2014 2013 data about engineer visits and direct feedback from customers, Year ended 31 March £m £m £m which should help reduce customer complaints and avoid repeat Revenue 5,011 5,061 5,115 visits; Operating costs 2,411 2,460 2,473 • trialled the ‘View my Engineer’ app which allows CPs and end customers to see the engineer’s progress towards their job. It EBITDA 2,600 2,601 2,642 means they can contact the engineer if they need to change the Depreciation and amortisation 1,348 1,406 1,428 appointment, avoiding wasted visits and costs and customer Operating profit 1,252 1,195 1,214 dissatisfaction; and Capital expenditure 1,082 1,049 1,144 • invested in proactive maintenance of our copper network Operating cash flow 1,502 1,492 1,475 to reduce faults in key trouble hotspots, saving engineer interventions. We prevented more than 100,000 faults during Revenue declined 1% (2013/14: 1%). Regulatory price changes the year thanks to improved targeting and increasing our had a negative impact of around £180m, the equivalent of around financial investment by 10%. This helped stabilise our network, 4% of our revenue. This was partly offset by 41% growth in fibre although we were also helped by the kinder weather. broadband revenue due to strong market demand. Invest for growth Revenue from fibre broadband accounted for 10% of total revenue Our plan to invest over £3bn in our fibre broadband infrastructure this year compared to 7% last year. is a critical part of our investment for growth, but we know we must continue to innovate to meet customers’ changing needs. We Operating costs reduced 2% (2013/14: 1%). Cost efficiencies from announced large-scale trials this summer of ultrafast broadband improving engineer efficiency and reducing the number of tasks and with G.fast technology (see below). customer contacts were partly offset by a smaller benefit from the sale of redundant copper. In the year the sale of redundant copper Since we launched our superfast programme we have introduced generated net income of £29m, and we expect no benefit from this nearly 250 innovations and improvements as we continually try to in 2015/16. expand the reach of our network or make it easier to build. EBITDA was flat (2013/14: 2% down), and with depreciation We also invested in our copper network, which grew by 215,000 and amortisation down 4% (2013/14: 2%) driven by a lower lines this year, and continues to underpin the services we provide. depreciation charge on core network assets, operating profit was up And we continue to develop our Ethernet portfolio and offer 5% (2013/14: 2% decrease). competitive pricing.

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Capital expenditure of £1,082m increased £33m or 3% (2013/14: Performance in the year £95m or 8% decrease) driven by higher volumes of Ethernet We have improved the reliability of our IT systems. We have also provision, the expansion of our network to new homes and an continued to reduce our costs and the group’s energy consumption. increase in BDUK fibre rollout. Capital expenditure is net of £378m We have continued to develop our networks and platforms. This has grant funding (2013/14: £126m). resulted in new features being added, improvements in reliability and older technology being removed. You can read more about this Operating cash flow increased 1% (2013/14: 1%). on page 9. Key priorities Driving Continuous Improvement has been critical to transforming Our future plans include: our costs. By adopting ‘lean’ tools and techniques our global design • continuing to improve our customer service, through ongoing teams have been able to improve productivity. This has led to a investment and innovation; reduction in the cost and the amount of time it takes to create • progressing our G.fast trials and continuing to roll out fibre in product designs. We have further reduced our reliance on third- BDUK and hard-to-reach areas; and party vendors as we have continued to build our own IT development • reshaping Openreach around our customers to be ready for centres. You can read more about our global development centres on their future needs. page 10.

BT Technology, Service & Operations (BT TSO) Key priorities BT TSO is our internal service unit that is responsible for delivering and Our future plans include: operating our networks, platforms and IT systems. • developing new capabilities and processes to improve BT TSO works closely with each of our customer-facing lines of customers’ experiences; business. We create new products for them and make sure that • working with Openreach to deliver the first ultrafast broadband existing services evolve with the changing needs of their customers. trials (see page 45); • conducting technical trials of the voice and data capabilities of We are responsible for the whole lifecycle of BT’s global networks our IP core network to enable the migration to ‘all-IP’ services; and systems – from design, test and build through to operational • continuing to invest in our TV platform, adding new channels management. And we make sure that they are reliable and resilient. and launching the first season of our exclusive UEFA Champions We manage most of BT’s research and development and look at League and UEFA Europa League coverage; ways to differentiate BT though innovation. And we manage our • continuing to expand our global network to key cloud data worldwide patent portfolio. These are covered further on page 10. centres to offer our corporate customers enhanced security and performance when using cloud services such as Microsoft Azure Products and services and Amazon Web Services; and We manage the voice, data and TV platforms and the IT applications • running trials with enterprise customers so that they can control which make up the core infrastructure for BT’s products, services network functions such as firewalls and WAN optimisation from and internal systems. Through technology refresh and proactive IT servers on their sites. This could lead to a reduction in the maintenance we are improving the reliability of our networks and amount of specialist network hardware customers require. IT systems so that our customers do not suffer loss of service. Our people also design and deliver the large-scale global managed network services which are sold to many of the top companies in the world. We are replacing costly and inefficient legacy systems with newer ones. This saves us money and can free up capacity in the network. And it often reduces the amount of energy we use. We deliver and manage BT’s internal IT systems, such as our customer management and HR systems. Our investments in these have simplified our processes and improved the ways our people interact with them. Our service colleagues now have the information available to provide a better service for customers. Given the rapid pace of change in the technology that BT TSO people work on, we have developed comprehensive training and re-skilling programmes. We are also a major recruiter of UK graduates and modern apprentices. This is covered further on page 7.

802639 BT Group PLC.indb 46 5/19/2015 1:07:20 AM The Strategic Report 47 Group performance

GROUP Performance

In this section we discuss the performance of the group. We Trend in underlying revenue excluding transit explain how we have done this year against our key performance Our key measure of the group’s revenue trend, underlying indicators. We set out the financial results of the whole group revenue excluding transit, was down 0.4%, in line with the and we look at our performance as a sustainable and responsible outlook we set at the start of the year. business. BT Consumer revenue was up 7%, with strong growth in the We judge and explain our performance using certain alternative broadband and TV customer bases helped by BT Sport. This performance measures. These include trends in underlying growth was offset by declines in our other lines of business, revenue and operating costs excluding transit, and adjusted mainly reflecting egulatoryr price changes and lower UK public and reported EBITDA. ‘Adjusted’ means that a measure is before sector revenues. We explain more about the performance of our specific items. We describe on page 128 what we mean by specific lines of business from page 29. items and we have disclosed specific items for this year and the Underlying revenue reflects the overall performance of the group last two years in note 8 to the consolidated financial statements. that will contribute to long-term profitable revenue growth. We These alternative performance measures are not defined under exclude the impact of acquisitions and disposals, foreign exchange IFRS so they are termed non-GAAP measures. But they are movements and specific items from this measure. We focus on the consistent with how management measures the group’s financial trend in underlying revenue excluding transit because transit traffic performance. We have defined each of these measures on pages is low margin and affected by reductions in mobile termination 128 to 129, where we have provided more detail, including rates, which are outside our control. reconciliations to the nearest measure under IFRS. Adjusted EBITDA OUR PROGRESS AGAINST OUR KPIs Adjusted EBITDA grew 3% this year reflecting the impact of our We have made good progress on our two financial KPIs again this cost transformation activities. year. But our customer service needs to improve further. Adjusted EBITDA is defined as group profit before depreciation, We have outlined our performance against each of our KPIs amortisation, net finance expense, taxation and is before specific below, together with the definition of the measure, set out in items. We consider adjusted EBITDA to be a useful measure italics. We have provided reconciliations of the financial measures of our operating performance because it approximates the to the closest IFRS measure in the Additional information underlying operating cash flow by eliminating depreciation and section on pages 128 and 129. amortisation.

Customer service improvement Our customer service improvement measure, ‘Right First Time’ was up 4.7% compared to 1.5% last year. We have improved our customer service this year, but we are not satisfied and still want to do better. All of our lines of business contributed to this improvement. We delivered significantly better repair performance and shorter lead times for providing UK lines and broadband. BT Global Services made large gains in delivering more of its products within target times. Looking forward, we need to improve our provision of Ethernet services and recover more quickly when we do fail to meet our promises. ‘Right First Time’ is our key measure of customer service. This tracks how often we keep the promises we make to our customers. This could be about keeping to appointment times, fixing faults within an agreed period or answering calls promptly and dealing with queries or orders efficiently. As well as improving service and the customer experience, keeping our promises should mean that there is less work to do in correcting our mistakes, and so reduces our costs.

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GROUP FINANCIAL PERFORMANCE Payments to telecommunications operators (POLOs) were down Income statement 13% primarily reflecting lower transit volumes, a negative Summarised income statement foreign exchange movement and lower call volumes in BT Year ended 31 March 2015 2014 2013 Consumer. Net labour costs were down 8% as we increased Before specific items £m £m £m productivity while reallocating our labour resource to be more Revenue 17,851 18,287 18,339 efficient. Total labour costs including capitalised labour were Operating costsa (11,574) (12,169) (12,192) down by less, at 4%, as a result of using more indirect labour EBITDA 6,277 6,118 6,147 in capital projects, primarily in Openreach due to the BDUK programme. BT Sport programme rights charges were £330m Depreciation and amortisation (2,538) (2,695) (2,843) (2013/14: £203m), up 63% reflecting a full 12 months of Operating profit 3,739 3,423 3,304 sports rights charges. Property and energy costs were 1% higher Net finance expense (344) (383) (392) while other operating costs were down 1%. Other operating costs include sales of redundant copper which generated Associates and joint ventures (1) (3) 9 net income of £29m, and we expect no benefit from this in Profit before taxation 3,394 3,037 2,921 2015/16. Taxation (678) (662) (661) You can see a detailed breakdown of our operating costs in note 5 Profit for the year 2,716 2,375 2,260 to the consolidated financial statements. a Excluding depreciation and amortisation. Specific items Revenue As we have said on page 47, our commentary in this performance Our key revenue measure, underlying revenue excluding transit, review focuses on the results before specific items as this is how was down 0.4%. management measure the ongoing performance of the business. Reported revenue, which includes specific items, was down 2%. Specific items resulted in a net charge after tax of £406m Adjusted revenue was also down 2% at £17,851m. (2013/14: £196m). Underlying revenue excluding transit was down 0.4% compared We recognised revenue and EBITDA of £128m being the prior with a 0.5% increase in the prior year. We had a £231m negative year impacts of ladder pricing agreements with the UK mobile impact from foreign exchange movements, a £119m reduction in operators following the Supreme Court judgment in July 2014. transit revenue and an £8m negative impact from disposals. Specific items charged against operating costs included £315m Growth in BT Consumer was offset by declines in our other lines of (2013/14: £276m) relating to the group-wide restructuring business. BT Consumer revenue was up 7%, with strong growth programme that started in 2012/13. These costs primarily relate in the broadband and TV customer bases. We are very pleased to leavers and property and network rationalisation. with the performance of BT Sport which has contributed to both Regulatory judgments on Ethernet product pricing in prior years top and bottom-line growth. Openreach revenue was down 1%, and an assessment of certain other historical regulatory matters driven by regulatory price changes which were partly offsetby led to a charge of £75m in the year. the benefit of fibre broadband growth. BT Business underlying revenue excluding transit revenue declined marginally with lower We had a property rationalisation net benefit of £22m being a call and line volumes reflecting the migration of customers to profit of £67m on the disposal of a surplus building in London, broadband and IP services. BT Wholesale underlying revenue Keybridge House, partly offset by a £45m increase in onerous excluding transit was down 7%. The impact of regulatory price lease provisions. We incurred costs of £26m relating to BT Group changes and a large contract termination were partly offset by plc’s proposed acquisition of EE. Of these, £19m have been the recognition of ladder pricing revenue in the fourth quarter. In recognised in operating costs and £7m relate to financing costs. BT Global Services, UK public sector revenue was lower, with this partly offset by our high-growth regions. Net interest on pensions of £292m (2013/14: £235m) was charged as a specific item. The increase mainly reflects the higher You can see a full breakdown of reported revenue by major deficit at 31 March 2014 of £7.0bn compared to the deficit of product and service category in note 4 to the consolidated £5.9bn at 31 March 2013. financial statements. Specific items also include a tax credit of £121m (2013/14: EBITDA £111m) reflecting the tax on specific items charged within profit Adjusted EBITDA increased 3% to £6,277m (2013/14: flat). before tax. The prior year included a tax credit of £208m on the re-measurement of deferred tax balances from a rate of 23% to An analysis of adjusted EBITDA for each of our customer-facing 20%. There is no credit this year as the rate of tax for 2015/16 is lines of business is included on pages 29 to 46. Further details are unchanged at 20%. also set out in note 4 to the consolidated financial statements. You can see details of all specific items charged to the income Operating costs statement in the last three years in note 8 to the consolidated We reduced operating costs before depreciation and amortisation financial statements. by 5%. Profit before tax Our total operating costs before depreciation and amortisation Adjusted profit before tax was up 12% at £3,394m. were down £595m at £11,574m (2013/14: flat). Our ability to reduce costs while investing reflects ourfocus on cost control. The increase in adjusted profit before tax reflects our EBITDA Underlying operating costs before depreciation and amortisation performance and our focus in recent years on capital expenditure and excluding transit decreased 2%. In aggregate, we have efficiencies and debt reduction, which has resulted in lower reduced operating costs and capital expenditure by around depreciation and amortisation and a lower net finance expense. £5.5bn over the last six years despite significant investment Reported profit before tax (which includes specific items) was up across the business. 14% to £2,867m.

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Net finance expense We have made investments for the future of our business, while Net finance expense before specific items of £344m (2013/14: supporting our pension, funding BT Group plc’s share buyback £383m) decreased by £39m. programme and paying dividends to our parent company.

Year ended 31 March 2015 2014 2013 We secured FA Premier League football rights for a further Before specific items £m £m £m three years and we paid a deposit of £29m. We also paid a Interest on borrowings 567 593 660 further £240m for our existing FA Premier League football Capitalised interest (2) (1) (5) broadcast rights. Fair value movements on The outflow from non-current amounts owed by the ultimate derivatives 14 11 11 parent company mainly comprised the funding of the Total finance expense 579 603 666 ultimate parent’s payments of equity dividends of £924m Total finance income (235) (220) (274) (2013/14: £778m) and share buyback programme of £320m (2013/14: £302m), offset by the proceeds of the ultimate Net finance expense 344 383 392 parent’s issue of treasury shares of £201m (2013/14: £75m). Finance expense of £579m (2013/14: £603m) decreased by The net outflow of £1,774m (2013/14: £1,242m) on current £24m as we have reduced average gross debt by £324m, from financial assets comprises both the investment and redemption £9,336m to £9,012m. of amounts held in liquidity funds and term deposits. We have Finance income of £235m (2013/14: £220m) increased by increased the level of our investments following the bond issue £15m mainly due to higher average balances due from the during the year. parent and ultimate parent companies. Capital expenditure is discussed on page 50. We discuss depreciation and tax in later sections of this The net cash cost of specific items was £154m (2013/14: performance review. £356m) mainly comprising restructuring costs of £267m Dividends (2013/14: £267m), ladder pricing receipts of £88m (2013/14: A dividend of £1,200m was settled on 15 May 2014. The £nil), and a net property rationalisation benefit of £51m directors have declared a final dividend of £1,450m, which (2013/14: cost of £55m). will be recognised as an appropriation of retained earnings in Last year the cash cost of specific items included payments of 2015/16. £19m relating to the acquisition of ESPN’s UK and Ireland TV channels business and £16m relating to claims against which we Cash flow have provisions. Summarised cash flow statement a 2015 2014 2013 Year ended 31 March £m £m £m Taxation Our effective corporation tax rate was 20.0% compared with Cash generated from 21.8% in 2013/14. This is slightly lower in both years than the operating activities 5,105 5,143 5,359 UK corporation tax rate of 21% (2013/14: 23%). Income taxes paid (309) (347) (64) Net cash inflow from Our tax contribution operating activities 4,796 4,796 5,295 We are proud to be a major contributor to the UK economy and have paid over £16bn of UK corporation tax since privatisation Cash flow from investing activities in 1984. Interest received 10 73 134 This year we paid UK corporation tax of £225m (2013/14: Disposals and acquisitions 10 (22) 222 Movement on non-current £299m). Our UK corporation tax liabilities for the year were amounts owed by reduced by tax deductions on our all-employee share option plan maturities in the summer of 2014, as well as the tax deductible parent company – (67) (125) Movement on non-current pension deficit payments. Both these factors will also affect our amounts owed by ultimate UK corporation tax payments in 2015/16. We paid non-UK corporate income taxes of £84m (2013/14: £48m). parent company (1,046) (1,005) (876) Net movement on current In addition to paying UK corporation tax, we pay other taxes, financial assets (1,774) (1,242) (19) such as Employer’s National Insurance and Business Rates, that Capital expenditure (2,318) (2,346) (2,438) represent a significant cost to our business each year. We are Purchases of also a major collector of taxes, directly paying income tax and telecommunications licences – – (202) National Insurance due on our people’s wages, and VAT, to the Other 8 4 4 UK Exchequer. We describe the total of the taxes that are a true cost to our business and those that we collect and pay on behalf Cash flow from financing activities of our people and customers as our ‘Total Tax Contribution’. Interest paid (590) (614) (701) Proceeds from loan from This year our Total Tax Contribution for the UK was £3.0bn ultimate parent company 1,003 – – (2013/14: £3.0bn). The Hundred Group Total Tax Contribution Loans and borrowings (692) 436 (727) Survey for 2014 ranked us as the sixth highest UK contributor. Other 297 (209) 33 We also contributed £0.4bn (2013/14: £0.4bn) in our largest non-UK jurisdictions. Net (decrease) increase in cash and cash equivalents (296) (196) 600 a On a reported basis – after specific items.

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Our approach to tax Capital expenditure The way we approach tax is set centrally at a group level and is We are making significant investments in our strategic growth agreed by the Board. Our main focus is to comply with the tax areas and to improve our customer service. By continuing to laws and regulations in each of the countries in which we do transform and drive efficiencies within our capital programmes business. Our group tax team supports regional management to we have been able to invest in our growth strategy without meet local tax regulations and reviews potential tax exposures increasing our overall capital expenditure. regularly. We take the benefit of widely claimed tax incentives, Our capital expenditure net of grant funding was £2,326m reliefs and exemptions in order to reduce the tax cost to our (2013/14: £2,346m). business. Transactions between group companies are paid for as if between unconnected companies, applying OECD principles. Our capital expenditure in recent years has focused on underpinning our growth strategy, and in particular on expanding We have an open and effective working relationship with HM and enhancing our next generation access network, which Revenue & Customs and are committed to this approach with includes both fibre and Ethernet. Ongoing investments this year local tax authorities around the world. This includes discussing to support our strategy include: the tax impact of major business decisions with the tax authorities when they happen. • increasing the footprint of our fibre broadband network, including extending the reach of fibre to rural areas under Tax expense the BDUK programme. We have now passed more than 22m Our total tax expense before specific items was £678m homes and businesses representing over three-quarters of UK (2013/14: £662m). This is not the same as the total corporation premises; tax we paid in the year because of differences between tax • continuing to build our TV capabilities, including Ultra-High accounting rules and those for making corporation tax payments. Definition and TV Everywhere, as well as enhancing our content distribution network; Our effective tax rate on profit before taxation and specific items • developing our capabilities and propositions for Mobility and is slightly lower than the UK statutory corporation tax rate. As Future Voice to exploit the convergence of fixed and mobile we have shown below, this is due to the use of non-UK losses, services; prior year adjustments and other tax adjustments, which include • expansion of our next generation networks, including tax savings from claiming incentives and reliefs. In the absence expanding capacity on our IP Exchange platform; of any other factors, we would expect our effective tax rate to • continued development of customer contract-specific be around the UK corporation tax rate, as the majority of our infrastructure for our global clients; and business occurs in the UK. • improving customer experience by developing new systems Year ended 31 March 2015 2014 2013 and replacing elements of our network to reduce faults and Before specific items £m £m £m speed up repair times. Profit before taxation 3,394 3,037 2,921 We recognised grant funding of £392m (2013/14: £126m), Tax at UK statutory rate of 21% mainly relating to our capital activity on the BDUK programme. (2013/14: 23%, 2012/13: 24%) 713 699 701 Of our total capital expenditure, £231m (2013/14: £239m) Non-UK losses utilised (36) (13) (14) arose outside the UK. Capital expenditure contracted but not yet Prior year adjustments (35) (17) (57) incurred was £507m at 31 March 2015 (2013/14: £400m). Non-deductible items 16 16 31 Other tax adjustments 20 (23) – Depreciation and amortisation Effective tax charge 678 662 661 Depreciation and amortisation reduced 6% to £2,538m, due Effective tax rate 20.0% 21.8% 22.6% to lower capital expenditure in recent years as we have become more efficient in delivering our capital investment programmes. The UK corporation tax rate has been falling annually since 1 April Our software development costs have reduced historically, 2011. It changed from 23% to 21% on 1 April 2014 and from and some of our previous network investments became fully 21% to 20% on 1 April 2015. This has had a major influence on depreciated in 2013/14, both of which added to the overall our effective tax rate in recent years. reduction in depreciation and amortisation. We have shown a reconciliation of reported profit before taxation, which includes specific items, to total tax expense in note 9 to the consolidated financial statements.

Tax losses We have £20.8bn of tax losses (2013/14: £21.3bn) that we have not given any value to on our balance sheet. Of these, £17.1bn are capital losses arising in the UK. Of the remaining tax losses of £3.2bn, most arose in our non-UK companies in earlier financial years. We might be able to use the non-UK losses to offset tax liabilities in the future, but this will depend on us making profits in countries where we have previously made losses. We have given more details in note 9 to the consolidated financial statements.

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Balance sheet We have shown deferred tax movements in note 9 to the Summarised balance sheet consolidated financial statements. Pensions, net of deferred tax, Our balance sheet reflects our significant investment in the increased by £0.5bn to £6.1bn and are discussed below. network infrastructure assets that are the foundation of our business, as well as the working capital with which we manage Loans and other borrowings our business day by day. It also reflects the longer-term funding Loans and other borrowings were £10,772m compared with strategy with which we finance our investments, and our £9,814m at 31 March 2014, an increase of £958m. obligation to the pension fund. During 2014/15 we issued £812m of term debt in the capital markets to refinance maturing debt of £1,151m and ensure we At 31 March 2015 2014 Movement Before specific items £m £m £m have liquidity to refinance term debt of £1,271m, maturing in early 2015/16. The effective Sterling interest rate on this five- Property, plant & equipment, year bond was 2.71%. software and telecoms licences 15,216 15,525 (309) Goodwill & other acquisition At 31 March 2015 £1,004m was due to the ultimate parent related intangible assets 1,467 1,410 57 company in respect of the proceeds from the equity placing for Other non-current & current the proposed EE acquisition. BT Group plc issued 222m ordinary assets 21,324 19,812 1,512 shares for £1.0bn in contemplation of this proposed acquisition Trade & other receivables 3,325 3,125 200 and transferred these proceeds to BT plc. Investments, cash & cash In June and July 2014 our €750m and €600m bonds matured equivalents 4,000 3,242 758 resulting in a cash outflow of £1,151m. Other cash flow Total assetsa 45,332 43,114 2,218 movements included £38m repayment of other debt due within Loans & other borrowings (10,772) (9,814) (958) one year. Trade & other payables (5,283) (14) (5,297) Debt of £1.9bn is due for repayment during 2015/16, Other current & non-current comprising of term debt of £1.3bn, other debt of £0.4bn and liabilities (2,031) (214) (2,245) accrued interest of £0.2bn. Provisions (564) (533) (31) Deferred tax liability (948) (829) (119) In February 2015 we signed a new £3.6bn facility agreement Pensions, net of deferred tax (6,102) (5,641) (461) in relation to financing the proposed acquisition of EE. This Total liabilities (25,928) (24,131) (1,797) facility will be available until the earlier of August 2016 and the completion of the acquisition. This facility had not been drawn Total equity 19,404 18,983 421 down at 31 March 2015. a Excluding deferred tax asset relating to the BT Pension Scheme. Pensions Our core network infrastructure is included within property, plant Overview and equipment, software and telecommunications licences. This We provide a number of retirement plans for our employees. is the backbone of the UK telecoms industry and a significant core The largest of these plans is the BT Pension Scheme (BTPS), a asset for our business. These assets were held at a net book value defined benefit plan in the UK. Although closed to new members, of £15.2bn at 31 March 2015. The net reduction of £309m in the BTPS still has around 38,000 active members, 196,000 the year reflects the related depreciation and amortisation charge pensioners and 72,500 deferred members. The BT Retirement of £2,538m exceeding capital expenditure of £2,326m. Saving Scheme (BTRSS) is the current arrangement for UK Goodwill and other acquisition-related intangible assets employees who joined the group after 1 April 2001. It has increased by £57m, primarily reflecting the impact of foreign around 29,000 active members. exchange translation of overseas non-current assets. We review the recoverable amounts of goodwill annually across BT Global The BTPS and BTRSS are not controlled by the Board or by the Services, BT Business and BT Consumer, the three cash generating BT Group plc Board. The BTPS is managed by a separate and units which hold goodwill, and are satisfied that these support its independent Trustee. Details of the governance of the BTPS, its carrying value (see note 11). financial position, performance of its investments and a summary of member benefits are available in the BTPS Annual Report Other non-current and current assets and liabilities relate published by the Trustee in December 2014, on the BTPS Trustee primarily to our financial instruments, which we have described in website (www.btpensions.net). note 24 to the consolidated financial statements. The BTRSS is a contract-based, defined contribution arrangement Trade and other receivables increased by £200m to £3,325m provided by Standard Life under which members choose their while trade and other payables of £5,297m were £14m higher, own investments and receive benefits at retirement that are contributing to the working capital outflow in the year. For more linked to the performance of those investments. details, see our cash flow section on page 49. We maintain arrangements in most other countries with a focus Investments, cash and cash equivalents, and loans and other on these being appropriate for the local market and culture. borrowings are explained in notes 20, 21 and 22 to the consolidated financial statements. We have given more information on our pension arrangements and on the funding and accounting valuations in note 18 to the Provisions increased by £31m to £564m. We have a significant consolidated financial statements. property portfolio which includes both office buildings and former telephone exchanges (see page 9). Onerous lease provisions amounted to £217m.

03_802639_Financial Review_p47-60.indd 51 5/28/2015 8:49:11 AM 52 BT plc Annual Report & Form 20-F 2015

BTPS funding valuation and future funding obligations Contractual obligations and commitments The funding of our main defined benefit pension plan, the BTPS, We have set out below our principal contractual financial is subject to legal agreement between BT and the Trustee of the obligations and commitments at 31 March 2015. You can see BTPS, which is determined at the conclusion of each triennial further details on these items in notes 18, 22 and 28 to the valuation. The most recent triennial funding valuation at 30 June consolidated financial statements; note 28 includes details 2014 and the associated deficit contribution plan was agreed with relating to our financial commitments and contingent liabilities. the Trustee and certified by the Scheme Actuary in January 2015. Payments due by period Between Between At 30 June 2014, the market value of assets was £40.2bn Less than 1 and 3 and More than and the funding deficit was £7.0bn. There are a wide range Total 1 year 3 years 5 years 5 years £m £m £m £m £m of assumptions that could be adopted for measuring pension a b liabilities and legislation requires that this deficit is based on a Loans and other borrowings 10,391 1,888 2,660 1,560 4,283 cautious or prudent view – for example, assuming a lower future Finance lease obligations 238 14 23 22 179 investment return than might be expected in practice. Operating lease obligations 6,524 427 793 742 4,562 Capital commitments 507 496 4 4 3 A 16-year deficit contribution plan was agreed reflecting BT’s Programme rights long-term and sustainable cash flow generation. Under this plan, commitments 2,512 644 1,432 396 40 we made deficit payments of £875m in March 2015 and £625m c Pension deficit obligations 8,721 875 938 1,410 5,498 in April 2015. Total 28,893 4,344 5,850 4,134 14,565 Further payments of £250m will be made in each of 2015/16 a Excludes fair value adjustments for hedged risks. b and 2016/17, bringing the total for the three years to 31 March Includes £196m of accrued interest due within less than one year. c £625m of the £875m was paid in April 2015. 2017 to £2.0bn.

Accounting position under IAS 19 At 31 March 2015 our cash, cash equivalents and current asset The accounting deficit, net of tax, has increased in the year from investments were £4bn. We have an unused committed borrowing £5.6bn to £6.1bn. facility of £1.5bn and an unused £3.6bn committed acquisition facility which can be accessed to fund BT Group plc’s planned Actuarial gains on plan assets for 2014/15 reflect actual acquisition of EE. investment returns in the BTPS over the year of around 12% which were above the IAS 19 discount rate of 4.25%. These resources and our future cash generation are expected to allow us to settle our obligations as they fall due. A fall in the real discount rate for the BTPS, from 0.97% to 0.39%, led to an increase in the liabilities which is an actuarial loss on liabilities. This was partially offset by a fall in liabilities from allowing for scheme and membership experience over the year following the use of updated membership data.

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Delivering societal and environmental benefits and data structures into their lessons with children from the age We want to move beyond just being a sustainable and responsible of five. From the 2015 academic year, we will develop a more business leader to completely integrating our purpose into all comprehensive schools programme across the UK, to realise our that we say, do and deliver. This should not only improve our ambition to help 5m children by 2020. business performance, but make us more healthy and resilient overall. Creating a connected society We are building on our existing ambition to deliver access to Our goal is sustainable profitable revenue growth; and we are fibre-based products and services to nine out of ten people able to demonstrate tangible progress in benefiting society and in the UK. Our new 2020 ambition is ‘Helping 10m people our own business. We have set out below some innovations and overcome social disadvantage through the benefits our products new developments from this year, which show that sustainability and services can bring.’ This is a clear opportunity to show how and revenue generation can be mutually reinforcing. our products and services can deliver social benefit and make a real difference to people all over the world. We can show Societal benefit Business benefit how communications technology and the services we deliver can positively address key social issues such as poverty, social Connecting Africa project Connecting Africa project has mobility, an ageing population and disability. provided satellite broadband paved the way for the launch to up to 73,000 people of additional commercial VSAT This year we published the Social Return on Investment analysis offerings in South Africa of our UK digital inclusion. This is helping private, public and voluntary sector organisations to measure the impact of being 30,000 people trained 24% of people go on to buy online. We have focused on material outcomes to individuals, through Get IT Together broadband. Regional digital BT and the UK economy. For the first time this has enabled us to – over 25% expected to skills projects reinforce local measure the social impact of our digital skills programmes and experience a reduction in government relationships feed this insight back into the product development cycle. Using social isolation as a result this methodology, we have calculated that the benefit of getting online is worth £1,064 per person, per year rising to £3,568 for 7.1Mt of customer CO2 £3.4bn of revenues an advanced user. emissions abated, 11% more contributing to carbon than last year, increased abatement. Over £36m of Valuing Digital Inclusion influence on climate policy cost savings from energy Year ended 31 March 2015 reduction (£168m over the past six years) Benefits 60% of learners report 78% of learners stay Many of our social and environmental programmes are improved confidence online after the Get IT Together course underpinned by our proactive approach to volunteering. We have given an update on our progress on page 8. 25% of learners Reduced travel with report a reduction environmental savings Supporting charities and communities in social isolation of 1.6m tonnes of CO2 We continue to make an additional ‘investment in society’ each year. In 2014/15, this totalled £32.5m. This was made up of So far we have helped 30,000 We measure the social value a mixture of cash, time volunteered and in-kind contributions; people take part in courses of someone going online in equating to 1.15% of our previous year’s adjusted profit before and gain confidence and the UK at £1,064 a year tax. This brings our total investment to around £197.5m over the competence in using the internet past seven years (an average of 1.2% of adjusted profit before tax each year). Research by Just Economics for BT This year we helped generate £83.7m towards good causes, meaning we have achieved £231.4m cumulatively towards Delivering environmental benefits our target of £1bn by 2020. We continue to build on our long- This year we helped our customers reduce their carbon emissions term partnerships with our strategic charity partners. We have by 1.5 times the end-to-end carbon impact of our business, supported Comic Relief since its launch 30 years ago. On the from 7.1Mt to 4.6Mt. This was an improvement on last year of appeal night this year, all 230,000 telethon calls were handled 1.3:1, but we still have some way to go to achieve our 2020 goal over our network, peaking at 84 calls per second. Our MyDonate of a 3:1 ratio. We are continuing to develop new products and platform handled over £7.4m of donations. Red Nose Day 2015 solutions that can help our suppliers and customers reduce their had a very high level of employee engagement from across the carbon emissions. This year we generated revenues of £3.4bn business, with over 3,300 volunteers participating in a variety of globally from these products. fundraising activities – equivalent to £1.4m of benefit-in-kind. We are using our research capabilities to explore ways to improve the sustainability credentials of our products and Developing a culture of tech literacy services, as we have done with our latest Home Hub 5. Our We are funding the Barefoot Computing project to help primary research includes investigating how our products can reduce school teachers get to grips with the new schools’ computing carbon impact through improved energy efficiency or the use curriculum. BT volunteers are delivering the teacher training of more sustainable materials. We also aim to extend the life of workshops at scale. Since March 2014, the project has provided our products by refurbishment and reuse. We proactively apply computer science resources and training to over 5,500 primary design specifications to our new products and services to help school teachers. This enables teachers with little previous us identify improvement opportunities, such as removing the computer science knowledge to integrate algorithms, abstraction installation CDs from our new hub.

802639 BT Group PLC.indb 53 5/19/2015 1:07:21 AM 54 BT plc Annual Report & Form 20-F 2015

Update on how we are delivering our purpose – 2014/15 We continue to demonstrate our leadership in delivering societal and environmental benefits and we have evolved our existing 2020 ambitions to give focus to two other key areas: Tech Literacy and the Social Impact of our products and services. Out of our seven foundation performance indicators below, we have made progress against five, but failed to meet two, our sickness absence rate and our ethical trading.

Our 2020 ambitions 2013/14 performance 2014/15 performance Status Target for 2015/16 Page

Supporting Use our skills and technology to help £87m raised for £84m raised for Continue to 53 charities and generate more than £1bn for good good causes good causes improve upon total communities causes of £232m Cumulative total since Cumulative total since 2012: £148m 2012: £232m

Inspire two-thirds of our people to 16% of BT people 26% of BT people Improve upon 8 volunteer by 2020a volunteering volunteering 26% of BT people volunteering

Creating a More than 9 out of 10 people in the UK 6 out of 10 people 7.5 out of 10 people Continue to 53 connected will have access to fibre-based products can access fibre- can access fibre- improve against society and services based products and based products and 2014/15 services services performance

Helping 10m people overcome social n/a – new target n/a – new target Start to deliver 53 disadvantage through the benefits our against 2020 products and services can bringa target of 10m people

Building a Help 5m children receive better n/a – new target n/a – new target Start to deliver 53 culture of Tech teaching in tech skillsa against 2020 Literacy target of 5m children

Delivering Help our customers reduce carbon 1.3:1 achieved 1.5:1 achieved Improve upon 1.5:1 53 environmental emissions by at least 3 times the end- benefits to-end carbon impact of our business

Our foundations for being a sustainable and responsible business

Our foundations 2013/14 performance 2014/15 performance Status Target for 2015/16 Page

Our Investment in responsible and sustainable 1.01% of PBT 1.15% of PBT Maintain 1% of PBT 53 investment business practices; to be more than 1% of invested invested invested adjusted profit before tax (PBT)

Our customers Customer service: a measure across 1.5% improvement 4.7% improvement Continue to 3 our entire customer base. Target is to improve RFT from consistently improve RFT 2014/15 level

Our employees Employee engagement index: a 3.82/5 achieved 3.82/5 achieved Maintain or improve 8 measure of our relationship with our from 2014/15 employees performance

Sickness absence rate: % of calendar 2.10% calendar days 2.23% calendar days Maintain or improve 8 days lost to sickness absence lost in sickness lost in sickness from 2014/15 performance

Ethical performance 4.29/5 achieved 4.33/5 achieved Maintain or improve 23 a measure of our employees’ awareness from 2014/15 and training performance

Our suppliers Ethical trading: a measure of our supply 97% follow-up 96% follow-up 100% follow-up 12 chain review; with specific focus on within within three months within three months, Human Rights three months for all those suppliers identified as high/ medium risk

Our CO2e emissions: a measure of our 79% reduction in 79% reduction in Continue to deliver 16 environmental climate change impact net CO2e emission net CO2e emission against 80% target impact intensity against intensity against by December 2020 1996/97 levels 1996/97 levels

a New 2020 ambition.

To find out more about our 2020 ambitions, our methodologies and how our Target met Target failed Ongoing results are calculated, take a look at www.bt.com/deliveringourpurpose

802639 BT Group PLC.indb 54 5/19/2015 1:07:21 AM Report of the Directors 55 Statutory information­­

REPORT OF THE DIRECTORS STATUTORY INFORMATION­ Introduction So far as each of the directors is aware, there is no relevant The directors submit their report and the audited financial information that has not been disclosed to the auditors and each statements of the company, British Telecommunications plc, and of the directors believes that all steps have been taken that ought the group, which includes its subsidiary undertakings, for the to have been taken to make them aware of any relevant audit 2014/15 financial year. information and to establish that the auditors have been made aware of that information. The audited consolidated financial statements are presented on pages 61 to 109 and 127. Capital management and funding policy The capital structure is managed by BT Group plc, the ultimate Dividend parent company of the group. During the year a final dividend of £1,200m (2013/14: £1,300m) has been paid to the parent company, BT Group The objective of BT Group plc’s capital management and funding Investments Limited. The directors have declared a final dividend policy is to reduce the group’s net debta while investing in the of £1,450m for 2014/15. business, supporting the pension fund and paying progressive dividends. Principal activity The BT Group plc Board reviews the group’s capital structure The company is the principal trading subsidiary of BT Group plc, regularly. Management proposes actions which reflect the which is its ultimate parent company. group’s investment plans and risk characteristics as well as the BT Group plc is one of the world’s leading communications macro-economic conditions in which we operate. services companies. In the UK, we sell products and services BT Group plc’s funding policy is to raise and invest funds centrally to to consumers and small and medium-sized enterprises (SMEs). meet the group’s anticipated requirements. We use a combination Around the world, as well as in the UK, we provide managed of capital market bond issuance, commercial paper borrowing, networked IT services to large multinational corporations, committed borrowing facilities and investments. These are planned domestic businesses and the public sector. We also sell wholesale so as to mature at different stages in order to meet short, medium telecoms services to communications providers in the UK and and long-term requirements. internationally. Details of our treasury policy are included in note 24 to the Directors consolidated financial statements. The directors, who served throughout 2014/15 and continued to be directors as at the date of this report, were Tony Chanmugam, Financial instruments Glyn Parry and Sean Williams. Details of the group’s financial risk management objectives and policies of the group and exposure to interest risk, credit risk, Directors’ and officers’ liability insurance and indemnity liquidity risk and foreign exchange are given in note 24 to the BT Group plc purchases insurance to cover the directors, officers consolidated financial statements. and employees in positions of managerial supervision of BT Group plc and its subsidiaries against defence costs, civil damages Credit risk management policy and, in some circumstances, civil fines and penalties following We take proactive steps to minimise the impact of adverse market an action brought against them in their personal capacity. The conditions on our financial instruments. In managing investments insurance operates to protect the directors and officers directly in and derivative financial instruments, the group’s central treasury circumstances where, by law, BT cannot provide an indemnity and function monitors the credit quality across treasury counterparties also provides BT, subject to a retention, with cover against the and actively manages any exposures which arise. This central team cost of indemnifying a director or officer. One layer of insurance is continually reviews any credit exposures, whether arising from ring-fenced for the directors of BT Group plc. centrally-managed financial instruments or from the group’s trade- related receivables. Management within the lines of business also As at 13 May 2015, and throughout 2014/15, BT plc, has actively monitors any exposures arising from trading balances. provided an indemnity in respect of a similar group of people to those covered by the above insurance. Neither the insurance Off-balance sheet arrangements nor the indemnity provides cover where the person has acted Other than the financial commitments and contingent liabilities fraudulently or dishonestly. disclosed in note 28 to the consolidated financial statements, there are no off-balance sheet arrangements that have, or are reasonably Financial statements likely to have, a current or future material effect on: our financial A statement by the directors of their responsibilities for preparing condition; changes in financial condition; revenues or expenses; the financial statements is included in theStatement of results of operations; liquidity; capital expenditure; or capital directors’ responsibilities on page 58. resources. Our critical accounting estimates and key judgements, and significant accounting policies are set out on pages 66 to 72 of the consolidated financial statements and conform with IFRS. These policies and applicable estimation techniques have been reviewed by the directors who have confirmed them to be appropriate for the preparation of the 2014/15 consolidated a financial statements. Net debt is a measure of BT Group plc’s consolidated net indebtedness that provides an indicator of the overall balance sheet strength of the group. Net debt consists of loans and other borrowings (both current and non-current), less current asset investments and cash and cash equivalents. At 31 March 2015 BT Group plc’s net debt was £5,199m (2013/14: £7,028m).

802639 BT Group PLC.indb 55 5/19/2015 1:07:21 AM 56 BT plc Annual Report & Form 20-F 2015

Legal proceedings only reasonable, and not absolute, assurance against material We do not believe that there is any single current court action that misstatement or loss. The process in place for reviewing our would have a material adverse effect on our financial position or systems of internal control includes procedures designed to operations. During 2014/15, the aggregate volume and value of identify and evaluate failings and weaknesses, and, in the case legal actions which we are party to reduced. of any classed as significant, we have procedures to ensure that necessary action is taken to remedy the failings. Going concern BT has enterprise-wide risk management processes for The Strategic Report on pages 2 to 54 includes information identifying, evaluating and managing the principal risks faced by on the group structure, the performance of each of the lines of the group. These processes have been in place throughout the business, the impact of regulation and competition and principal year and have continued up to the date on which this document risks and uncertainties. The Group performance section on was approved. The processes are in accordance with the Revised pages 47 to 54 includes information on our group financial Guidance for Directors on the UK Governance Code published by results, cash flow, loans and borrowings and balance sheet the Financial Reporting Council (the ‘Turnbull Guidance’). position. Notes 20, 21, 22 and 24 of the consolidated financial statements include information on the group’s investments, cash Risk assessment and evaluation takes place as an integral part of and cash equivalents, loans and borrowings, derivatives, financial BT Group plc’s annual strategic planning cycle. There is a detailed risk management objectives, hedging policies and exposure to risk management process, culminating in a BT Group plc Board interest, foreign exchange, credit, liquidity and market risks. review, which identifies the key risks facing the group, each line of business and our internal service unit, BT TSO. This information Alongside the factors noted above, the directors have considered is reviewed by senior management as part of the strategic review. BT Group plc’s cash flow forecasts, as they relate to the group, in Our current key risks are summarised in the Purpose and strategy particular with reference to the period to the end of May 2016. section – Our risks on pages 17 to 25. The directors are satisfied that these cash flow forecasts, taking into account reasonably possible risk sensitivities associated with The key features of our enterprise-wide risk management and these forecasts and BT Group plc’s current funding and facilities, internal control process (covering financial, operational and alongside BT Group plc’s funding strategy, show that the group compliance controls) are: will continue to operate for the foreseeable future. The directors • Senior executives collectively review the group’s key risks therefore continue to have a reasonable expectation that the group and have created a Group Risk Register describing the risks, has adequate resources to continue in operational existence for owners and mitigation strategies. This is reviewed by BT Group the foreseeable future and continue to adopt a going concern basis plc’s Group Risk Panel and Operating Committee before it is (in accordance with the guidance ‘Going Concern and Liquidity reviewed and approved by the BT Group plc Board; Risk: Guidance for Directors of UK Companies 2009’ issued by the • The lines of business and BT TSO carry out risk assessments Financial Reporting Council) in preparing the consolidated financial of their operations, create risk registers relating to those statements. operations, and ensure that the key risks are addressed; There has been no significant change in the financial or trading • Senior executives with responsibility for major group position of the group since 31 March 2015. operations report quarterly their opinion on the effectiveness of the operation of internal controls in their areas of Auditors responsibility; PricewaterhouseCoopers and its predecessor firms have been • The internal auditors carry out continuing assessments BT’s auditors since BT listed on the London Stock Exchange of the quality of risk management and control, report to in 1984. The external auditors are required to rotate the lead management and the BT Group plc Audit & Risk Committee partner every five years and other partners who are responsible on the status of specific areas identified for improvement and for the group and subsidiary audits must change at least every promote effective risk management in the lines of business seven years. Such changes are carefully planned to ensure and BT TSO; and business continuity without undue risk or inefficiency. The • The BT Group plc Audit & Risk Committee, on behalf of the partner responsible for BT’s audit is completing his sixth year BT Group plc Board, considers the effectiveness of the group’s within the group audit team and his third year as lead partner internal control procedures during the financial year. It reviews which is a role he can continue for a further year. reports from the internal and external auditors and reports its conclusions to the BT Group plc Board. The BT Group plc Audit We are aware of the relevant regulation and guidance on audit & Risk Committee has carried out these actions for 2014/15. tendering. EU regulations and the Competition and Markets Authority’s ruling will impose rotation requirements meaning We have not dealt with joint ventures and associates, which BT that the group’s auditors must be changed by 2021. does not control, as part of the group risk management process. They are responsible for their own internal control assessment. The BT Group plc Audit & Risk Committee will continue to consider annually the timetable for audit tendering and rotation, Our significant accounting policies are set out on pages68 to 72. taking into account the annual review of the effectiveness of the The consistent application of those policies is subject to ongoing auditors and other relevant factors such as change programmes verification through management review and independent impacting the business. As the group engages a number of audit review by internal and external auditors. firms for non-audit services the rotation will be carefully planned to ensure that the new auditors are independent. US SARBANES-OXLEY ACT OF 2002 The company has debt securities registered with the US Securities Internal control and risk management and Exchange Commission (SEC). As a result, we must comply The Board of BT Group plc is responsible for the group’s systems with those provisions of the Sarbanes-Oxley Act applicable of internal control and risk management and for reviewing to foreign issuers. We comply with the legal and regulatory the effectiveness of those systems each year. These systems requirements introduced pursuant to this legislation, in so far as are designed to manage, rather than eliminate, the risk of they are applicable. failure to achieve business objectives; any system can provide

802639 BT Group PLC.indb 56 5/19/2015 1:07:21 AM Report of the Directors 57 Statutory information­­

Disclosure controls and procedures There were no changes in the company’s internal control over The principal executive officer and the principal financial officer, financial reporting that occurred during 2014/15 that have after evaluating the effectiveness of the company’s disclosure materially affected, or are reasonably likely to have materially controls and procedures as of the end of the period covered by affected, BT’s internal control over financial reporting. Any this Annual Report & Form 20-F, concluded that, as of such date, significant deficiency, as defined by the US Public Company the company’s disclosure controls and procedures were effective Accounting Oversight Board (PCAOB), in internal control over to ensure that material information relating to the company was financial reporting, is reported to the BT Group plc Audit & Risk made known to them by others within the group. Committee. The principal executive officer and principal financial officer PricewaterhouseCoopers LLP, which has audited the consolidated concluded that the company’s disclosure controls and procedures financial statements of the group for 2014/15, has also audited are also effective to ensure that the information required to the effectiveness of the group’s internal control over financial be disclosed by the company in reports that it files under the reporting under Auditing Standard No. 5 of the PCAOB. Their Securities Exchange Act 1934 (Exchange Act) is recorded, report is on page 60. processed, summarised and reported within the time periods specified in the rules and forms of the SEC. CROSS REFERENCE TO THE STRATEGIC REPORT As permitted by the Companies Act, we have chosen to include in The principal executive officer and the principal financial the Strategic Report the following information (required by law officer also provided the certifications required by the Sarbanes- to be included in the Report of the Directors): Oxley Act. • an indication of likely future developments in the business of Internal control over financial reporting the company (see the Strategic Report on pages 2 to 54); BT’s management is responsible for establishing and maintaining • an indication of our research and development activities adequate internal control over financial reporting for the group. (page 10); Internal control over financial reporting is designed to provide • information about our people (page 7); and reasonable assurance regarding the reliability of financial • information about greenhouse gas emissions (page 16). reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS. Management By order of the Board conducted an assessment of the effectiveness of internal control over financial reporting based on the framework for internal control evaluation contained in the Revised Guidance for Directors on the UK Governance Code published by the Financial Heather Brierley Reporting Council (the Turnbull Guidance). Secretary 13 May 2015 Based on this assessment, management has concluded that at Registered Office: 81 Newgate Street, London EC1A 7AJ 31 March 2015, the company’s internal control over financial Registered in England and Wales No. 1800000­ reporting was effective.

802639 BT Group PLC.indb 57 5/19/2015 1:07:21 AM 58 BT plc Annual Report & Form 20-F 2015

statement of directors’ responsibilities for preparing the financial statements­

The directors are responsible for preparing the Annual Report The directors are responsible for keeping adequate accounting and the financial statements in accordance with applicable law records that are sufficient to show and explain the company’s and regulations. Company law requires the directors to prepare transactions and disclose with reasonable accuracy at any time financial statements for each financial year. Under that law the the financial position of the company and the group and enable directors have elected to prepare the consolidated financial them to ensure that the financial statements comply with the statements in accordance with International Financial Reporting Companies Act 2006 and, as regards the consolidated financial Standards (‘IFRS’) as adopted by the European Union, and the statements, Article 4 of the IAS Regulation. They are also parent company financial statements in accordance with United responsible for safeguarding the assets of the company and the Kingdom Generally Accepted Accounting Practice (‘UK GAAP’). group and hence for taking reasonable steps for the prevention In preparing the consolidated financial statements, the directors and detection of fraud and other irregularities. have also elected to comply with IFRS, issued by the International Each of the directors, whose names are listed on page 55 Accounting Standards Board (‘IASB’). Under company law the confirms that, to the best of their knowledge: directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of • the consolidated financial statements, which have been affairs of the group and the company and of the profit or loss of prepared in accordance with IFRS, as adopted by the European the group for that period. Union, give a true and fair view of the assets, liabilities, financial position and profit of the group; In preparing these financial statements, the directors are required • the Strategic Report on pages 2 to 54 includes a fair review to: of the development and performance of the business and • select suitable accounting policies and then apply them the position of the group, together with a description of the consistently; principal risks and uncertainties that it faces; and • make judgements and accounting estimates that are • the parent company financial statements, which have been reasonable and prudent; prepared in accordance with UK GAAP, give a true and fair • state whether IFRS, as adopted by the European Union, and view of the assets, liabilities and financial position of the IFRS issued by the IASB and applicable UK GAAP have been parent company. followed, subject to any material departures disclosed and ­ explained in the consolidated and parent company financial statements respectively; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

802639 BT Group PLC.indb 58 5/19/2015 1:07:21 AM Report of the independent auditors 59

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF BRITISH TELECOMMUNICATIONS PLC UNITED KINGDOM OPINION Report on the group financial statements Responsibilities for the financial statements and the audit Our opinion Our responsibilities and those of the directors In our opinion, British Telecommunications plc’s group financial As explained more fully in the Statement of directors’ statements (the ‘financial statements’): responsibilities set out on page 58, the directors are responsible for the preparation of the financial statements and for being • give a true and fair view of the state of the group’s affairs as satisfied that they give a true and fair view. at 31 March 2015 and of its profit and cash flows for the year then ended; Our responsibility is to audit and express an opinion on the • have been properly prepared in accordance with International financial statements in accordance with applicable law and Financial Reporting Standards (‘IFRS’) as adopted by the International Standards on Auditing (UK and Ireland) (‘ISAs (UK & European Union; and Ireland)’). Those standards require us to comply with the Auditing • have been prepared in accordance with the requirements of Practices Board’s Ethical Standards for Auditors. the Companies Act 2006 and Article 4 of the IAS Regulation. This report, including the opinions, has been prepared for and Separate opinion in relation to IFRS as issued by the IASB only for the company’s members as a body in accordance with As explained in note 1 to the financial statements, the group, Chapter 3 of Part 16 of the Companies Act 2006 and for no other in addition to applying IFRS as adopted by the European Union, purpose. We do not, in giving these opinions, accept or assume has also applied IFRS as issued by the International Accounting responsibility for any other purpose or to any other person to Standards Board (‘IASB’). whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. In our opinion, the financial statements comply with IFRS as issued by the IASB. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). What we have audited An audit involves obtaining evidence about the amounts British Telecommunications plc’s financial statements comprise: and disclosures in the financial statements sufficient to give • the group balance sheet as at 31 March 2015; reasonable assurance that the financial statements are free from • the group income statement and group statement of material misstatement, whether caused by fraud or error. This comprehensive income for the year then ended; includes an assessment of: • the group cash flow statement for the year then ended; • whether the accounting policies are appropriate to the • the group statement of changes in equity for the year then group’s circumstances and have been consistently applied and ended; and adequately disclosed; • the notes to the financial statements, which include a • the reasonableness of significant accounting estimates made summary of significant accounting policies and other by the directors; and explanatory information. • the overall presentation of the financial statements. The financial reporting framework that has been applied in the We primarily focus our work in these areas by assessing the directors’ preparation of the financial statements is applicable law and IFRS judgements against available evidence, forming our own judgements, as adopted by the European Union. and evaluating the disclosures in the financial statements. In applying the financial reporting framework, the directors have We test and examine information, using sampling and other made a number of subjective judgements, for example in respect auditing techniques, to the extent we consider necessary to of significant accounting estimates. In making such estimates, provide a reasonable basis for us to draw conclusions. We obtain they have made assumptions and considered future events. audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, the information given in the Strategic Report and In addition, we read all the financial and non-financial the Report of the Directors for the financial year for which the information in the Annual Report & Form 20-F 2015 to financial statements are prepared is consistent with the financial identify material inconsistencies with the audited financial statements. statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the Other matters on which we are required to report by exception knowledge acquired by us in the course of performing the audit. Adequacy of information and explanations received If we become aware of any apparent material misstatements or Under the Companies Act 2006 we are required to report to you inconsistencies we consider the implications for our report. if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to Other matter report arising from this responsibility. We have reported separately on the parent company financial statements of British Telecommunications plc for the year ended Directors’ remuneration 31 March 2015. Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report Paul Barkus (Senior Statutory Auditor) arising from this responsibility. for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 13 May 2015

03_802639_Financial Review_p47-60.indd 59 5/19/2015 11:45:20 AM 60 BT plc Annual Report & Form 20-F 2015

Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of British Telecommunications plc (the ‘company’) UNITED STATES OPINION In our opinion, the accompanying group balance sheets and A company’s internal control over financial reporting is a the related group income statements, group statements of process designed to provide reasonable assurance regarding the comprehensive income, group statements of changes in equity reliability of financial reporting and the preparation of financial and group cash flow statements present fairly, in all material statements for external purposes in accordance with generally respects, the financial position of British Telecommunications plc accepted accounting principles. A company’s internal control over and its subsidiaries at 31 March 2015 and 31 March 2014, and financial reporting includes those policies and procedures that (i) the results of their operations and their cash flows for each of the pertain to the maintenance of records that, in reasonable detail, three years in the period ended 31 March 2015 in conformity accurately and fairly reflect the transactions and dispositions of with International Financial Reporting Standards as issued by the the assets of the company; (ii) provide reasonable assurance that International Accounting Standards Board. Also in our opinion, transactions are recorded as necessary to permit preparation the company maintained, in all material respects, effective of financial statements in accordance with generally accepted internal control over financial reporting as of 31 March 2015, accounting principles, and that receipts and expenditures of the based on criteria established in the Turnbull Guidance. company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide The company’s management is responsible for these financial reasonable assurance regarding prevention or timely detection statements, for maintaining effective internal control over of unauthorised acquisition, use, or disposition of the company’s financial reporting and for its assessment of the effectiveness assets that could have a material effect on the financial of internal control over financial reporting, included in statements. management’s evaluation of the effectiveness of internal control over financial reporting as set out in the first two Because of its inherent limitations, internal control over financial paragraphs of Internal control over financial reporting in the reporting may not prevent or detect misstatements. Also, Report of the Directors, Statutory information, of the British projections of any evaluation of effectiveness to future periods Telecommunications plc Annual Report & Form 20-F 2015. are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of Our responsibility is to express opinions on these financial compliance with the policies or procedures may deteriorate. statements and on the company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards PricewaterhouseCoopers LLP require that we plan and perform the audits to obtain reasonable London, United Kingdom assurance about whether the financial statements are free of 13 May 2015 material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

802639 BT Group PLC.indb 60 5/19/2015 1:07:21 AM Consolidated financial statements 61 Group income statement­

CONSOLIDATED FINANCIAL STATEMENTS GROUP INCOME STATEMENT­

Before specific Specific items itemsa Total ­Year ended 31 March 2015 Notes £m £m £m Revenue 4 17,851 128 17,979 Operating costs 5 (14,112) (381) (14,493) Operating profit (loss) 4 3,739 (253) 3,486 Finance expense 23 (579) (299) (878) Finance income 23 235 – 235 Net finance expense (344) (299) (643) Share of post tax loss of associates and joint ventures (1) – (1) Profit on disposal of interest in associates and joint ventures 8 – 25 25 Profit (loss) before taxation 3,394 (527) 2,867 Taxation 9 (678) 121 (557) Profit (loss) for the year 2,716 (406) 2,310

Before specific Specific items itemsa Total Year ended 31 March 2014 Notes £m £m £m Revenue 4 18,287 – 18,287 Operating costs 5 (14,864) (276) (15,140) Operating profit (loss) 4 3,423 (276) 3,147 Finance expense 23 (603) (235) (838) Finance income 23 220 – 220 Net finance expense (383) (235) (618) Share of post tax loss of associates and joint ventures (3) – (3) Loss on disposal of interest in associates and joint ventures 8 – (4) (4) Profit (loss) before taxation 3,037 (515) 2,522 Taxation 9 (662) 319 (343) Profit (loss) for the year 2,375 (196) 2,179

Before specific Specific items itemsa Total Year ended 31 March 2013 Notes £m £m £m Revenue 4 18,339 (236) 18,103 Operating costs 5 (15,035) (116) (15,151) O perating profit (loss) 4 3,304 (352) 2,952 Finance expense 23 (666) (119) (785) Finance income 23 274 – 274 Net finance expense (392) (119) (511) Share of post tax profit of associates and joint ventures 9 – 9 Profit on disposal of interest in associates and joint ventures 8 – 130 130 Profit (loss) before taxation 2,921 (341) 2,580 Taxation 9 (661) 230 (431) Profit (loss) for the year 2,260 (111) 2,149 a For a definition of specific items, see page 128. An analysis of specific items is provided in note 8.

802639 BT Group PLC.indb 61 5/19/2015 1:07:21 AM 62 BT plc Annual Report & Form 20-F 2015

GROUP STATEMENT OF COMPREHENSIVE INCOME

2015 2014 2013 Year ended 31 March Notes £m £m £m Profit for the year 2,310 2,179 2,149 Other comprehensive (loss) income Items that will not be reclassified to the income statement Actuarial losses relating to retirement benefit obligations 18 (1,051) (1,179) (3,569) Tax on actuarial losses 9 208 16 762 Items that may be reclassified subsequently to the income statement Exchange differences on translation of foreign operations 25 5 (176) 47 Fair value movements on available-for-sale assets 25 7 (27) 14 Fair value movements on cash flow hedges: – net fair value gains (losses) 25 207 (528) 105 – recognised in income and expense 25 (218) 384 (168) Tax on components of other comprehensive income that may be reclassified 9, 25 37 4 24 Other comprehensive loss for the year, net of tax (805) (1,506) (2,785) Total comprehensive income (loss) for the year 1,505 673 (636)

802639 BT Group PLC.indb 62 5/19/2015 1:07:22 AM Consolidated financial statements 63 Group balance sheet

GROUP BALANCE SHEET

2015 2014 At 31 March Notes £m £m Non-current assets Intangible assets 11 3,178 3,095 Property, plant and equipment 12 13,505 13,840 Derivative financial instruments 24 1,232 539 Investments 20 19,614 18,846 Associates and joint ventures 26 18 Trade and other receivables 15 184 214 Deferred tax assets 9 1,559 1,460 39,298 38,012 Current assets Programme rights 14 118 108 Inventories 94 82 Trade and other receivables 15 3,141 2,911 Current tax receivable 65 26 Derivative financial instruments 24 97 114 Investments 20 3,571 2,552 Cash and cash equivalents 21 429 690 7,515 6,483 Current liabilities Loans and other borrowings 22 1,902 1,873 Derivative financial instruments 24 168 139 Trade and other payables 16 5,297 5,283 Current tax liabilities 222 315 Provisions 17 142 99 7,731 7,709 Total assets less current liabilities 39,082 36,786

Non-current liabilities Loans and other borrowings 22 8,870 7,941 Derivative financial instruments 24 927 679 Retirement benefit obligations 18 7,583 7,022 Other payables 16 928 898 Deferred tax liabilities 9 948 829 Provisions 17 422 434 19,678 17,803

Equity Ordinary shares 2,172 2,172 Share premium 8,000 8,000 Other reserves 25 1,194 1,156 Retained earnings 8,038 7,655 Total equity 19,404 18,983 39,082 36,786

The consolidated financial statements on pages 61 to 109 and 127 were approved by the Board of Directors on 13 May 2015 and were signed on its behalf by

Tony Chanmugam Director

802639 BT Group PLC.indb 63 5/19/2015 1:07:22 AM 64 BT plc Annual Report & Form 20-F 2015

GROUP STATEMENT OF CHANGES IN EQUITY

Share Share Other Retained Total capitala premiumb reservesc earnings equity Notes £m £m £m £m £m At 1 April 2012 2,172 8,000 1,477 9,712 21,361 Profit for the year – – – 2,149 2,149 Other comprehensive income (loss) – before tax – – 166 (3,569) (3,403) Tax on other comprehensive income (loss) 9 – – 24 762 786 Transferred to the income statement – – (168) – (168)

Total comprehensive income (loss) – – 22 (658) (636) Share-based payments 19 – – – 64 64 Tax on share-based payments 9 – – – 68 68 Dividends to parent company 10 – – – (1,400) (1,400) Other movements – – – (9) (9) At 1 April 2013 2,172 8,000 1,499 7,777 19,448 Profit for the year – – – 2,179 2,179 Other comprehensive (loss) income – before tax – – (731) (1,179) (1,910) Tax on other comprehensive income (loss) 9 – – 4 16 20 Transferred to the income statement – – 384 – 384

Total comprehensive (loss) income – – (343) 1,016 673 Share-based payments 19 – – – 60 60 Tax on share-based payments 9 – – – 106 106 Dividends to parent company 10 – – – (1,300) (1,300) Other movements – – – (4) (4) At 1 April 2014 2,172 8,000 1,156 7,655 18,983 Profit for the year – – – 2,310 2,310 Other comprehensive income (loss) – before tax – – 219 (1,051) (832) Tax on other comprehensive income (loss) 9 – – 37 208 245 Transferred to the income statement – – (218) – (218)

Total comprehensive income – – 38 1,467 1,505 Share-based payments 19 – – – 70 70 Tax on share-based payments 9 – – – 54 54 Dividends to parent company 10 – – – (1,200) (1,200) Other movements – – – (8) (8) At 31 March 2015 2,172 8,000 1,194 8,038 19,404

a The allotted, called up and fully paid ordinary share capital of the company at 31 March 2015 and 31 March 2014 was £2,172m comprising 8,689,755,905 ordinary shares of 25p each. b The share premium account, representing the premium on allotment of shares, is not available for distribution. c For further analysis of other reserves, see note 25.

802639 BT Group PLC.indb 64 5/19/2015 1:07:22 AM Consolidated financial statements 65 Group cash flow statement

GROUP CASH FLOW STATEMENT

2015 2014 2013­ Year ended 31 March Note £m £m £m Cash flow from operating activities Profit before taxation 2,867 2,522 2,580 (Profit) loss on disposal of interest in associates and joint ventures (25) 4 (130) Share of post tax loss (profit) of associates and joint ventures 1 3 (9) Net finance expense 643 618 511 Operating profit 3,486 3,147 2,952 Other non-cash items (20) 41 56 Loss (profit) on disposal of businesses 1 – (7) Depreciation and amortisation 2,538 2,695 2,843 (Increase) decrease in inventories (13) 16 3 (Increase) decrease in trade and other receivables (137) (259) 454 Decrease in trade and other payables (42) (163) (463) Decrease in other liabilitiesa (727) (234) (281) Increase (decrease) in provisions 19 (100) (198) Cash generated from operationsb 5,105 5,143 5,359 Income taxes paid (309) (347) (64) Net cash inflow from operating activities 4,796 4,796 5,295

Cash flow from investing activities Interest received 10 73 134 Proceeds on disposal of subsidiariesc, associates and joint ventures 26 2 287 Acquisition of subsidiariesc and joint ventures (16) (24) (65) Outflow on non-current amounts owed by parent companyd,e – (67) (125) Outflow on non-current amounts owed by ultimate parent companye (1,046) (1,005) (876) Proceeds on disposal of current financial assetsf 8,124 7,531 8,856 Purchases of current financial assetsf (9,898) (8,773) (8,875) Proceeds on disposal of non-current asset investments 8 4 4 Proceeds on disposal of property, plant and equipment 100 10 43 Purchases of property, plant and equipment and software (2,418) (2,356) (2,481) Purchases of telecommunications licences – – (202) Net cash outflow from investing activities (5,110) (4,605) (3,300)

Cash flow from financing activities Interest paid (590) (614) (701) Repayment of borrowingse,g (1,166) (339) (1,678) Net (repayment of) proceeds from commercial paper (338) (420) 153 Proceeds from loan from ultimate parent company 1,003 – – Proceeds from bank loans and bonds 812 1,195 798 Cash flows from derivatives related to net debt 297 (209) 33 Net cash used in financing activities 18 (387) (1,395)

Net (decrease) increase in cash and cash equivalents (296) (196) 600

Opening cash and cash equivalentsh 679 914 318 Net (decrease) increase in cash and cash equivalents (296) (196) 600 Effect of exchange rate changes 19 (39) (4) Closing cash and cash equivalentsh 21 402 679 914

a Includes pension deficit payments of £876m (2013/14: £325m, 2012/13: £325m). b Includes cash flows relating to TV programme rights. c Acquisitions and disposals of subsidiaries are shown net of cash acquired or disposed of. d In addition, there are non-cash movements in these intra-group loan arrangements which principally relate to funding and investment transactions between British Telecommunications plc and its subsidiaries where one of the parties to the transaction has an intra-group loan arrangement with the parent company. For further details see note 27. e In addition, there are non-cash movements in this intra-group loan arrangement which principally relate to settlement of dividends with the parent company and amounts the ultimate parent company was owed by the parent company which were settled through their loan accounts with British Telecommunications plc. For further details see notes 10 and 27. f Primarily consists of investment in and redemption of amounts held in liquidity funds. g Repayment of borrowings includes the impact of hedging and repayment of lease liabilities. h Net of bank overdrafts of £27m (2013/14: £11m, 2012/13: £5m).

­

802639 BT Group PLC.indb 65 5/19/2015 1:07:22 AM 66 BT plc Annual Report & Form 20-F 2015

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Preparation IFRS 9 ‘Financial Instruments’ Preparation of the financial statements IFRS 9 was published in July 2014 and will be effective for periods These consolidated financial statements have been prepared in beginning on or after 1 January 2018 subject to endorsement by accordance with the Companies Act 2006, Article 4 of the IAS the EU. It is applicable to financial assets and financial liabilities, Regulation and International Accounting Standards (IAS) and and covers the classification, measurement, impairment and de- International Financial Reporting Standards (IFRS) and related recognition of financial assets and financial liabilities together with a interpretations, as adopted by the European Union. The consolidated new hedge accounting model. financial statements are also in compliance with IFRS as issued by the International Accounting Standards Board (IASB). The consolidated The group is in the process of quantifying the impact of the new financial statements are prepared on a going concern basis. standard. The consolidated financial statements are prepared on the historical There are no other standards or interpretations issued but not yet cost basis, except for certain financial and equity instruments effective we expect to have a material impact on the group. that have been measured at fair value. The consolidated financial Presentation of specific items statements are presented in Sterling, the functional currency of The group’s income statement and segmental analysis separately British Telecommunications plc, the parent company. identify trading results before specific items. The directors believe that presentation of the group’s results in this way is relevant to Reorganisation From 1 April 2014 BT Conferencing has moved from BT Business an understanding of the group’s financial performance, as specific into BT Global Services. This simplifies the way we provide integrated items are identified by virtue of their size, nature or incidence. This collaboration solutions to our global customers. BT Security has presentation is consistent with the way that financial performance moved from our central group functions within Other into BT Global is measured by management and reported to the Board and the Services. Security is of increasing importance to our customers, and Operating Committee and assists in providing a meaningful analysis we believe that this move helps us better compete in the market and of the trading results of the group. In determining whether an event take full advantage of global opportunities. or transaction is specific, management considers quantitative as well as qualitative factors such as the frequency or predictability of In order to present historical information on a consistent basis, we occurrence. have revised comparatives for the years ended 31 March 2014 and 31 March 2013 in BT Global Services, BT Business and Other. There Furthermore, the group considers a columnar presentation to be is no impact on the total group results. The net assets (including appropriate, as it improves the clarity of the presentation and is goodwill) have been reallocated to the appropriate cash generating consistent with the way that financial performance is measured units to reflect this reorganisation (see note 11). The overall impact on by management and reported to the Board and the Operating the lines of business is disclosed in note 4. Committee of BT Group plc. Specific items may not be comparable to similarly titled measures New and amended accounting standards adopted with no significant used by other companies. Examples of charges or credits meeting impact on the group the above definition and which have been presented as specific items The following new and amended accounting standards adopted in the current and/or prior years include disposals of businesses and during the year did not have any significant impact on the group. investments, regulatory settlements, historic insurance or litigation • IAS 32 ‘Financial Instruments, Presentation Offsetting Financial claims, business restructuring programmes, asset impairment Assets and Financial Liabilities – Amendments to IAS 32’ charges, property rationalisation programmes, net interest on • IAS 39 ‘Novation of Derivatives and Continuation of Hedge pensions and the settlement of multiple tax years. In the event that Accounting’ other items meet the criteria, which are applied consistently from • IAS 36 ‘Recoverable Amount Disclosures for Non-financial year to year, they are also treated as specific items. Assets – Amendments to IAS 36’. Specific items for the current and prior years are disclosed in note 8.

New and amended accounting standards that have been issued but 2. Critical accounting estimates and key judgements are not yet effective The preparation of financial statements in conformity with IFRS The following standards have been issued and are effective for requires the use of accounting estimates and assumptions. It also accounting periods ending on or after 1 January 2015 and are requires management to exercise its judgement in the process of expected to have an impact on the group financial statements. applying the group’s accounting policies. We continually evaluate our estimates, assumptions and judgements based on available IFRS 15 ‘Revenue from Contracts with Customers’ information and experience. As the use of estimates is inherent in In May 2014, IFRS 15 ‘Revenue from Contracts with Customers’ was financial reporting, actual results could differ from these estimates. issued and is expected to be effective for periods beginning on or Management has discussed its critical accounting estimates and after 1 January 2017, subject to consultation on potential deferral by associated disclosures with the BT Group plc Audit & Risk Committee. one year and endorsement by the EU. The areas involving a higher degree of judgement or complexity are IFRS 15 sets out the requirements for recognising revenue from described below. contracts with customers. The standard requires entities to apportion revenue earned from contracts to individual promises, or performance obligations, on a relative standalone selling basis, based on a five-step model. The group is in the process of quantifying the impact of this standard.

802639 BT Group PLC.indb 66 5/19/2015 1:07:22 AM Notes to the consolidated financial statements 67

2. Critical accounting estimates and key judgements continued Provisions and contingent liabilities Long-term customer contracts As disclosed in note 17, the group’s provisions principally relate Long-term customer contracts can extend over a number of financial to obligations arising from property rationalisation programmes, years. During the contractual period recognition of costs and profits restructuring programmes, claims, litigation and regulatory risks. may be impacted by estimates of the ultimate profitability of each Under our property rationalisation programmes we have identified contract. If, at any time, these estimates indicate that any contract a number of surplus properties. Although efforts are being made to will be unprofitable, the entire estimated loss for the contract is sub-let this space, this is not always possible. Estimates have been recognised immediately. If these estimates indicate that any contract made of the cost of vacant possession and of any shortfall arising will be less profitable than previously forecast, contract assets may from any sub-lease income being lower than the lease costs. Any such have to be written down to the extent they are no longer considered shortfall is recognised as a provision. to be fully recoverable. The group performs ongoing profitability In respect of claims, litigation and regulatory risks, the group reviews of its contracts in order to determine whether the latest provides for anticipated costs where an outflow of resources is estimates are appropriate. considered probable and a reasonable estimate can be made of the Key factors reviewed include: likely outcome. The prices at which certain services are charged are regulated and may be subject to retrospective adjustment by • Transaction volumes or other inputs affecting future revenues regulators. Estimates are used in assessing the likely value of the which can vary depending on customer requirements, plans, regulatory risk. For all risks, the ultimate liability may vary from the market position and other factors such as general economic amounts provided and will be dependent upon the eventual outcome conditions. of any settlement. • Our ability to achieve key contract milestones connected with the transition, development, transformation and deployment Management exercise judgement in measuring the exposures to phases for customer contracts. contingent liabilities (see note 28) through assessing the likelihood • The status of commercial relations with customers and the that a potential claim or liability will arise and in quantifying the implication for future revenue and cost projections. possible range of financial outcomes. • Our estimates of future staff and third-party costs and the degree to which cost savings and efficiencies are deliverable. Current and deferred income tax The actual tax we pay on our profits is determined according to The carrying value of assets comprising the costs of the initial set complex tax laws and regulations. Where the effect of these laws and up, transition or transformation phase of long-term networked IT regulations is unclear, we use estimates in determining the liability services contracts is disclosed in note 15. for the tax to be paid on our past profits which we recognise in our financial statements. We believe the estimates, assumptions and Pension obligations judgements are reasonable but this can involve complex issues which BT has a commitment, mainly through the BTPS, to pay pension may take a number of years to resolve. The final determination of benefits to approximately 306,500 people over a period of more prior year tax liabilities could be different from the estimates reflected than 80 years. The accounting cost of these benefits and the present in the financial statements and may result in the recognition of an value of our pension liabilities depend on such factors as the life additional tax expense or tax credit in the income statement. expectancy of the members, the salary progression of our current employees, price inflation and the discount rate used to calculate Deferred tax assets and liabilities require management judgement the net present value of the future pension payments. We use in determining the amounts to be recognised. The group uses estimates for all of these factors in determining the pension costs and management’s expectations of future revenue growth, operating liabilities incorporated in our financial statements. The assumptions costs, and profit margins to determine the extent to which future reflect historical experience and our judgement regarding future taxable profits will be generated against which to consume the expectations. deferred tax assets. The value of the net pension obligation at 31 March 2015, the key The value of the group’s income tax assets and liabilities is disclosed financial assumptions used to measure the obligation, the sensitivity on the balance sheet on page 63. The carrying value of the group’s of the IAS 19 pension liability at 31 March 2015, and of the income deferred tax assets and liabilities is disclosed in note 9. statement operating charge in 2015/16 to changes in these assumptions are disclosed in note 18. Goodwill The recoverable amount of cash generating units (CGUs) has been Useful lives for property, plant and equipment and software determined based on value in use calculations. These calculations The plant and equipment in our networks is long lived with cables and require the use of estimates, including management’s expectations of switching equipment operating for over ten years and underground future revenue growth, operating costs, profit margins and operating ducts being used for decades. We also develop software for use in cash flows for each CGU. IT systems and platforms that supports the products and services The carrying value of goodwill and the key assumptions used in provided to our customers and that is also used within the group. performing the annual impairment assessment are disclosed The annual depreciation and amortisation charge is sensitive to in note 12. the estimated service lives allocated to each type of asset. Asset lives are assessed annually and changed when necessary to reflect Providing for doubtful debts current thinking on the remaining lives in light of technological BT provides services to consumer and business customers, mainly on change, network investment plans (including the group’s fibre credit terms. We know that certain debts due to us will not be paid rollout programme), prospective economic utilisation and physical through the default of a small number of our customers. Estimates, condition of the assets concerned. Changes to the service lives of based on our historical experience, are used in determining the level assets implemented from 1 April 2014 had no significant impact in of debts that we believe will not be collected. These estimates include aggregate on the results for the year ended 31 March 2015. such factors as the current state of the economy and particular The carrying values of software and property, plant and equipment industry issues. are disclosed in notes 11 and 12. The useful lives applied to the The value of the provision for doubtful debts is disclosed in note 15. principal categories of assets are disclosed on pages 69 and 70.

802639 BT Group PLC.indb 67 5/19/2015 1:07:22 AM 68 BT plc Annual Report & Form 20-F 2015

3. Significant accounting policies costs to completion exceed the estimated revenue for a contract, the The significant accounting policies applied in preparation of these full contract life loss is recognised immediately. consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless Multiple element arrangements otherwise stated. Where a contractual arrangement consists of two or more separate elements that have value to a customer on a standalone basis, Revenue revenue is recognised for each element as if it were an individual Revenue represents the fair value of the consideration received or contract. The total contract consideration is allocated between receivable for communication services and equipment sales, net of the separate elements on the basis of relative fair value and the discounts and sales taxes. Revenue is recognised when it is probable appropriate revenue recognition criteria are applied to each element that the economic benefits associated with a transaction will flow to as described above. the group and the amount of revenue and associated costs can be measured reliably. Where the group acts as an agent in a transaction, Operating and reportable segments it recognises revenue net of directly attributable costs. The group’s operating segments are reported based on financial information provided to the BT Group plc Operating Committee, as Services detailed on page 2, which is the key management committee and Revenue arising from separable installation and connection services represents the ‘chief operating decision maker’. is recognised when it is earned, upon activation. Revenue from the The group’s organisational structure reflects the different customer rental of analogue and digital lines and private circuits is recognised groups to which it provides communications products and services on a straight-line basis over the period to which it relates. Revenue via its customer-facing lines of business: BT Global Services, BT from calls is recognised at the time the call is made over the group’s Business, BT Consumer, BT Wholesale and Openreach. The customer- network. Subscription fees, consisting primarily of monthly charges facing lines of business are supported by an internal service unit: BT for access to broadband and other internet access or voice services, Technology, Service & Operations (BT TSO). are recognised as revenue as the service is provided. Revenue from the interconnection of voice and data traffic between other The customer-facing lines of business are the group’s reportable telecommunications operators is recognised at the time of transit segments and generate substantially all the group’s revenue. The across the group’s network. remaining operations of the group are aggregated and included within the ‘Other’ category to reconcile to the consolidated results Equipment sales of the group. The ‘Other’ category includes BT TSO and the group’s Revenue from the sale of equipment is recognised when all the centralised functions including procurement, supply chain and significant risks and rewards of ownership are transferred to the property management. customer, which is normally the date the equipment is delivered and accepted by the customer. Provisions for the settlement of significant legal, commercial and regulatory disputes, which are negotiated at a group level, are initially Long-term contractual arrangements recorded in the ‘Other’ segment. On resolution of the dispute, the full Revenue from long-term contractual arrangements including fixed impact is recognised in the relevant line of business’ results and offset price contracts to design and build software solutions, is recognised in the group results through the utilisation of the provision previously based on the percentage of completion method. The stage of charged to the ‘Other’ segment. Settlements which are particularly completion is estimated using an appropriate measure according to significant or cover more than one financial year may fall within the the nature of the contract such as the proportion of costs incurred definition of specific items as detailed on page 66. relative to the estimated total contract costs, or other measures of The costs incurred by BT TSO are recharged to the customer- completion such as the achievement of contract milestones and facing lines of business to reflect the services it provides to them. customer acceptance. In the case of time and materials contracts, Depreciation and amortisation incurred by BT TSO in relation to the revenue is recognised as the service is rendered. networks and systems it manages and operates on behalf of the Costs related to delivering services under long-term contractual customer-facing lines of business is allocated to the lines of business arrangements are expensed as incurred except for an element of costs based on their respective utilisation. Capital expenditure incurred by incurred in the initial contract set up, transition or transformation BT TSO for specific projects undertaken on behalf of the customer- phase, which is deferred and recorded within non-current assets. facing lines of business is allocated based on the value of the directly These costs are then recognised in the income statement on a straight attributable expenditure incurred. Where projects are not directly line basis over the remaining contract term, unless the pattern of attributable to a particular line of business, capital expenditure is service delivery indicates a different profile is appropriate. These allocated between them based on the proportion of estimated future costs are directly attributable to specific contracts, relate to future economic benefits. BT TSO and the group’s centralised functions activity, will generate future economic benefits and are assessed for are not reportable segments as they did not meet the quantitative recoverability on a regular basis. thresholds as set out in IFRS 8 ‘Operating Segments’ for any of the years presented. The percentage of completion method relies on estimates of total expected contract revenues and costs, as well as reliable measurement of the progress made towards completion. Unless the financial outcome of a contract can be estimated with reasonable certainty, no attributable profit is recognised. In such circumstances, revenue is recognised equal to the costs incurred to date, to the extent that such revenue is expected to be recoverable, or costs are accrued to bring the margin to nil. Recognised revenue and profits are subject to revisions during the contract if the assumptions regarding the overall contract outcome are changed. The cumulative impact of a revision in estimates is recorded in the period in which such revisions become likely and can be estimated. Where the actual and estimated

802639 BT Group PLC.indb 68 5/19/2015 1:07:22 AM Notes to the consolidated financial statements 69

3. Significant accounting policiescontinued The lives assigned to principal categories of assets are as follows: Performance of each reportable segment is measured based on Land and buildings adjusted EBITDA, defined as EBITDA before specific items, as Freehold buildings 40 years included in the internal financial reports reviewed by the BT Group Leasehold land and buildings Unexpired portion plc Operating Committee. EBITDA is defined as the operating profit of lease or 40 years, or loss before depreciation, amortisation, net finance expense and whichever is the shorter taxation. Adjusted EBITDA is considered to be a useful measure of the operating performance of the lines of business because it Network infrastructure approximates to the underlying operating cash flow by eliminating Transmission equipment depreciation and amortisation. It also provides a meaningful Duct 40 years analysis of trading performance by excluding specific items, which Cable 3 to 25 years are disclosed separately by virtue of their size, nature or incidence. Fibre 5 to 20 years Specific items are detailed in note 8 and are not allocated to the Exchange equipment 2 to 13 years reportable segments as this reflects how they are reported to the BT Other network equipment 2 to 20 years Group plc Operating Committee. Finance expense and income are not Other assets allocated to the reportable segments, as the central treasury function Motor vehicles 2 to 9 years manages this activity, together with the overall net debt position of Computers and office equipment 3 to 6 years the group.

Retirement benefits Assets held under finance leases are depreciated over the shorter of The group’s net obligation in respect of defined benefit pension plans the lease term or their useful economic life. Residual values and useful is the present value of the defined benefit obligation less the fair lives are reassessed annually and, if necessary, changes are recognised value of the plan assets. prospectively. The calculation of the obligation is performed by a qualified actuary Intangible assets using the projected unit credit method and key actuarial assumptions Identifiable intangible assets are recognised when the group controls at the balance sheet date. the asset, it is probable that future economic benefits attributable to the asset will flow to the group and the cost of the asset can The income statement expense is allocated between an operating be reliably measured. All intangible assets, other than goodwill, charge and net finance income or expense. The operating charge are amortised over their useful economic life. The method of reflects the increase in the defined benefit obligation resulting from amortisation reflects the pattern in which the assets are expected the pension benefit earned by active employees in the current period, to be consumed. If the pattern cannot be determined reliably, the the costs of administering the plans and any past service costs/ straight line method is used. credits such as those arising from curtailments or settlements. The net finance income or expense reflects the interest on the retirement Goodwill benefit obligations recognised in the group balance sheet, based Goodwill represents the excess of the cost of an acquisition over the on the discount rate at the start of the year. Actuarial gains and fair value of the group’s share of the identifiable net assets (including losses are recognised in full in the period in which they occur and are intangible assets) of the acquired business. presented in the group statement of comprehensive income. For the purpose of impairment testing, goodwill acquired in a The group also operates defined contribution pension plans and the business combination is allocated to each of the CGUs that is expected income statement expense represents the contributions payable for to benefit from the business combination. Each CGU to which the year. goodwill is allocated represents the lowest level within the group at which the goodwill is monitored for internal management purposes. Property, plant and equipment Property, plant and equipment are included at historical cost, net of accumulated depreciation, government grants and any impairment Computer software charges. An item of property, plant and equipment is derecognised on Computer software comprises computer software licences purchased disposal or when no future economic benefits are expected to arise from third parties, and also the cost of internally developed software. from the continued use of the asset. The difference between the sale Computer software licences purchased from third parties are initially proceeds and the net book value at the date of disposal is recognised recorded at cost. in operating costs in the income statement. Costs directly associated with the production of internally developed Included within the cost for network infrastructure and equipment software, including direct and indirect labour costs of development, are direct and indirect labour costs, materials and directly attributable are capitalised only where it is probable that the software will overheads. Depreciation is provided on property, plant and generate future economic benefits, the cost of the asset can be equipment on a straight line basis from the time the asset is available reliably measured and technical feasibility can be demonstrated, for use, to write off the asset’s cost over the estimated useful life in which case it is capitalised as an intangible asset on the balance taking into account any expected residual value. Freehold land is not sheet. Costs which do not meet these criteria and research costs are depreciated. expensed as incurred. The group’s development costs which give rise to internally developed software include upgrading the network architecture or functionality and developing service platforms aimed at offering new services to the group’s customers.

Telecommunications licences Licence fees paid to governments, which permit telecommunications activities to be operated for defined periods, are initially recorded at cost and amortised from the time the network is available for use to the end of the licence period.

802639 BT Group PLC.indb 69 5/19/2015 1:07:22 AM 70 BT plc Annual Report & Form 20-F 2015

3. Significant accounting policies continued net basis. Any remaining deferred tax asset is recognised only when, Acquired intangible assets – customer relationships and brands on the basis of all available evidence, it can be regarded as probable Intangible assets such as customer relationships or brands acquired that there will be suitable taxable profits, within the same jurisdiction, through business combinations are recorded at fair value at the date in the foreseeable future against which the deductible temporary of acquisition. Assumptions are used in estimating the fair values of difference can be utilised. these relationships or brands and include management’s estimates of Deferred tax is determined using tax rates that are expected to revenue and profits to be generated by them. apply in the periods in which the asset is realised or liability settled, based on tax rates and laws that have been enacted or substantively Estimated useful economic lives enacted by the balance sheet date. The estimated useful economic lives assigned to the principal categories of intangible assets are as follows: Basis of consolidation Computer software 2 to 10 years The group financial statements consolidate the financial statements Telecommunications licences 2 to 20 years of BT plc (‘the company’) and its subsidiaries, and they incorporate its Customer relationships and brands 5 to 15 years share of the results of associates and joint ventures using the equity method of accounting. Programme rights Programme rights are recognised on the balance sheet from the point A subsidiary is an entity that is controlled by another entity, known at which the legally enforceable licence period begins. Rights for as the parent or investor. An investor controls an investee when which the licence period has not started are disclosed as contractual the investor is exposed, or has rights, to variable returns from its commitments in note 28. Payments made to receive commissioned or involvement with the investee and has the ability to affect those acquired programming in advance of the legal right to broadcast the returns through its power over the investee. Non-controlling interests programmes are classified as prepayments. in the net assets of consolidated subsidiaries, which consist of the amounts of those interests at the date of the original business Programme rights are initially recognised at cost and are amortised combination and non-controlling share of changes in equity since from the point at which they are available for use, on a straight the date of the combination, are not material to the group’s financial line basis over the programming period, or the remaining licence statements. term, as appropriate. The amortisation charge is recorded within operating costs in the income statement. The results of subsidiaries acquired or disposed of during the year are consolidated from and up to the date of change of control. Where Programmes produced internally are recognised within current assets necessary, accounting policies of subsidiaries have been aligned at production cost, which includes labour costs and an appropriate with the policies adopted by the group. All intra-group transactions portion of relevant overheads, and charged to the income statement including any gains or losses, balances, income or expenses are over the period of the related broadcast. eliminated in full on consolidation. Programme rights are tested for impairment in accordance with the When the group loses control of a subsidiary, the profit or loss on group’s policy for impairment of non-financial assets set out below. disposal is calculated as the difference between (i) the aggregate of Related cash outflows are classified as operating cash flows in the the fair value of the consideration received and the fair value of any cash flow statement. retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non- Provisions controlling interests. The profit or loss on disposal is recognised as a Provisions are recognised when the group has a present legal or specific item. constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and Business combinations the amount can be reliably estimated. Provisions are determined by On acquisition of a subsidiary, purchase consideration is measured discounting the expected future cash flows at a pre-tax rate that at fair value, which is the aggregate of the fair values of the assets reflects current market assessments of the time value of money and transferred, liabilities incurred or assumed and the equity instruments the risks specific to the liability. Financial liabilities within provisions issued in exchange for control of the acquiree. Acquisition-related are initially recognised at fair value and subsequently carried at costs are expensed as incurred. The acquiree’s identifiable assets and amortised cost using the effective interest method. Onerous lease liabilities are recognised at their fair value at the acquisition date. provisions are measured at the lower of the cost to fulfil or to exit the contract. Goodwill arising on acquisition is recognised as an asset and measured at cost, representing the excess of the aggregate of the consideration, Current and deferred income tax the amount of any non-controlling interests in the acquiree, and Current income tax is calculated on the basis of the tax laws enacted the fair value of the acquirer’s previously held equity interest in the or substantively enacted at the balance sheet date in the countries acquiree (if any) over the net of the fair values of the identifiable where the company’s subsidiaries, associates and joint ventures assets and liabilities at the date of acquisition. operate and generate taxable income. The group periodically evaluates positions taken in tax returns with respect to situations in Impairment of non-financial assets which applicable tax regulation is subject to interpretation, and the Intangible assets with finite useful lives and property, plant and group establishes provisions where appropriate on the basis of the equipment are tested for impairment if events or changes in amounts expected to be paid to tax authorities. circumstances (assessed at each reporting date) indicate that the carrying amount may not be recoverable. When an impairment test Deferred tax is recognised, using the liability method, in respect of is performed, the recoverable amount is assessed by reference to the temporary differences between the carrying amount of the group’s higher of the net present value of the expected future cash flows assets and liabilities and their tax base. Deferred income tax assets and (value in use) of the relevant cash generating unit and the fair value liabilities are offset when there is a legally enforceable right to offset less cost to sell. current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a

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3. Significant accounting policies continued Leases of property, plant and equipment where the group holds Goodwill is reviewed for impairment at least annually. Impairment substantially all the risks and rewards of ownership are classified losses are recognised in the income statement, as a specific item. as finance leases. Finance lease assets are capitalised at the If a cash generating unit is impaired, impairment losses are allocated commencement of the lease term at the lower of the present value of firstly against goodwill, and secondly on a pro rata basis against the minimum lease payments or the fair value of the leased asset. The intangible and other assets. obligations relating to finance leases, net of finance charges in respect of future periods, are recognised as liabilities. Leases are subsequently Government grants measured at amortised cost using the effective interest method. Government grants are recognised when there is reasonable Leases where a significant portion of the risks and rewards are held by assurance that the conditions associated with the grants have been the lessor are classified as operating leases. Rentals are charged to the complied with and the grants will be received. income statement on a straight line basis over the period of the lease. Grants for the purchase or production of property, plant and equipment are deducted from the cost of the related assets and Share-based payments reduce future depreciation expense accordingly. Grants for the The ultimate parent of BT plc, BT Group plc operates a number of reimbursement of operating expenditure are deducted from the equity settled share-based payment arrangements, under which related category of costs in the income statement. Government the group receives services from employees in consideration for grants received relating to future expenditure are recognised as equity instruments (share options and shares) of BT Group plc. payments received in advance within Other payables. Equity settled share-based payments are measured at fair value at the date of grant excluding the effect of non market-based Once a government grant is recognised, any related contingent vesting conditions but including any market-based performance liability or contingent asset is treated in accordance with IAS 37 criteria and the impact of non-vesting conditions (for example ‘Provisions, Contingent Liabilities and Contingent Assets’. the requirement for employees to save). The fair value Foreign currencies determined at the grant date is recognised as an expense on a Foreign currency transactions are translated into the functional straight line basis over the vesting period, based on the group’s currency using the exchange rates prevailing at the date of the estimate of the options or shares that will eventually vest and transaction. Foreign exchange gains and losses resulting from the adjusted for the effect of non market-based vesting conditions. settlement of transactions and the translation of monetary assets and Fair value is measured using either the Binomial options pricing liabilities denominated in foreign currencies at period end exchange model or Monte Carlo simulations, whichever is most appropriate rates are recognised in the income statement line which most to the share-based payment arrangement. appropriately reflects the nature of the item or transaction. Service and performance conditions are vesting conditions. Any other On consolidation, assets and liabilities of foreign undertakings are conditions are non-vesting conditions which have to be taken into translated into Sterling at year end exchange rates. The results of account to determine the fair value of equity instruments granted. In foreign undertakings are translated into Sterling at average rates the case that an award or option does not vest as a result of a failure of exchange for the year (unless this average is not a reasonable to meet a non-vesting condition that is within the control of either approximation of the cumulative effects of the rates prevailing on the counterparty, this is accounted for as a cancellation. Cancellations are transaction dates, in which case income and expenses are translated treated as accelerated vesting and all remaining future charges are at the dates of the transactions). Foreign exchange differences arising immediately recognised in the income statement. As the requirement on retranslation are recognised directly in a separate component of to save under an employee saveshare arrangement is a non-vesting equity, the translation reserve. condition, employee cancellations are treated as an accelerated vesting. In the event of the disposal of an undertaking with assets and liabilities denominated in a foreign currency, the cumulative Awards that lapse or are forfeited result in a credit to the income translation difference associated with the undertaking in the statement (reversing all previously recognised charges) in the year in translation reserve is charged or credited to the gain or loss on which they lapse or are forfeited. disposal recognised in the income statement. Termination benefits Research and development Termination benefits (leaver costs) are payable when employment is Research expenditure is recognised in the income statement in the terminated before the normal retirement date, or when an employee period in which it is incurred. Development expenditure, including accepts voluntary redundancy in exchange for these benefits. The the cost of internally developed software, is recognised in the group recognises termination benefits when it is demonstrably income statement in the period in which it is incurred unless it is committed to the affected employees leaving the group. probable that economic benefits will flow to the group from the asset being developed, the cost of the asset can be reliably measured Financial instruments and technical feasibility can be demonstrated, in which case it is Financial liabilities at amortised cost Trade and other payables capitalised as an intangible asset on the balance sheet. Capitalisation Financial liabilities within trade and other payables are initially ceases when the asset being developed is ready for use. Research and recognised at fair value, which is usually the original invoiced amount, development costs include direct and indirect labour, materials and and subsequently carried at amortised cost using the effective directly attributable overheads. interest method. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys the right to use the asset.

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3. Significant accounting policies continued Where the fair value of a derivative contract at initial recognition Loans and other borrowings is not supported by observable market data and differs from the Loans and other borrowings are initially recognised at the fair value transaction price, a day one gain or loss will arise which is not of amounts received net of transaction costs. Loans and other recognised in the income statement. Such gains and losses are borrowings are subsequently measured at amortised cost using deferred and amortised to the income statement based on the the effective interest method and, if included in a fair value hedge remaining contractual term and as observable market data becomes relationship, are re-valued to reflect the fair value movements on available. the hedged risk associated with the loans and other borrowings. The resulting amortisation of fair value movements, on de-designation of Hedge accounting the hedge, is recognised in the income statement. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedge. To qualify Available-for-sale investments for hedge accounting, hedge documentation must be prepared at Liquid and other investments are classified as available-for-sale inception and the hedge must be expected to be highly effective investments and are initially recognised at fair value plus direct both prospectively and retrospectively. The hedge is tested for transaction costs and then re-measured at subsequent reporting effectiveness at inception and in subsequent periods in which the dates to fair value, with unrealised gains and losses (except for hedge remains in operation. Hedge accounting is discontinued when changes in exchange rates for monetary items, interest, dividends and the hedging instrument expires, or is sold, terminated or no longer impairment losses, which are recognised in the income statement) qualifies for hedge accounting or the group chooses to end the hedge recognised in equity until the financial asset is derecognised, at which relationship. The group designates certain derivatives as either cash time the cumulative gain or loss previously recognised in equity is flow hedges or fair value hedges. taken to the income statement, in the line that most appropriately reflects the nature of the item or transaction. On disposal or Cash flow hedges impairment of the investments, any gains and losses that have been When a derivative financial instrument is designated as a hedge deferred in other comprehensive income are reclassified to the of the variability in cash flows of a recognised asset or liability, or a income statement. Dividends on equity investments are recognised highly probable transaction, the effective part of any gain or loss on in the income statement when the group’s right to receive payment the derivative financial instrument is recognised directly in equity, is established. Equity investments are recorded in non-current assets in the cash flow reserve. For cash flow hedges of recognised assets unless they are expected to be sold within one year. or liabilities, the associated cumulative gain or loss is removed from equity and recognised in the same line of the income statement and Loans and receivables in the same period or periods that the hedged transaction affects the Trade and other receivables income statement. Any ineffectiveness arising on a cash flow hedge Trade and other receivables are initially recognised at fair value, which of a recognised asset or liability is recognised immediately in the same is usually the original invoiced amount, and are subsequently carried income statement line as the hedged item. Where ineffectiveness at amortised cost, using the effective interest method, less provisions arises on highly probable transactions, it is recognised in the income made for doubtful receivables. Provisions are made specifically where statement line which most appropriately reflects the nature of the there is evidence of a risk of non-payment, taking into account item or transaction. ageing, previous losses experienced and general economic conditions. Fair value hedges Cash and cash equivalents When a derivative financial instrument is designated as a hedge Cash and cash equivalents comprise cash in hand and current balances of the variability in fair value of a recognised asset or liability, or with banks and similar institutions, which are readily convertible to unrecognised firm commitment, the change in fair value of the cash and are subject to insignificant risk of changes in value and have derivative that is designated as a fair value hedge is recorded in the an original maturity of three months or less. For the purpose of the income statement at each reporting date, together with any changes consolidated cash flow statement, cash and cash equivalents are as in fair value of the hedged asset or liability that is attributable to the defined above net of outstanding bank overdrafts. Bank overdrafts hedged risk. are included within loans and other borrowings, in current liabilities on the balance sheet.

Financial assets and liabilities at fair value through profit or loss All of the group’s derivative financial instruments are held for trading and classified as fair value through profit or loss.

Derivative financial instruments The group uses derivative financial instruments mainly to reduce exposure to foreign exchange and interest rate risks. The group’s policy is not to use derivatives for trading purposes. However, derivatives that do not qualify for hedge accounting or are specifically not designated as a hedge where natural offset is more appropriate are initially recognised and subsequently measured at fair value through profit and loss. Any direct transaction costs are recognised immediately in the income statement. Gains and losses on remeasurement are recognised in the income statement in the line that most appropriately reflects the nature of the item or transaction to which they relate. Derivative financial instruments are classified as current assets or current liabilities where they have a maturity period within 12 months. Where derivative financial instruments have a maturity period greater than 12 months, they are classified within either non-current assets or non-current liabilities.

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4. Segment information The definition of the group’s operating and reportable segments is provided on page 68. From 1 April 2014 BT Conferencing and BT Security have moved into BT Global Services from BT Business and our central group functions within Other respectively. This simplifes the way we provide integrated collaboration solutions to our global customers, better compete in the market and take full advantage of global opportunities. Comparative results for BT Global Services, BT Business and Other and intra- group items have been restated to be presented on a consistent basis. The impact on line of business results for the year ending 31 March 2014 was to increase revenue, EBITDA and operating profit in BT Global Services by £228m, £109m and £99m (2012/13: £222m, £118m and £109m) and to reduce revenue, EBITDA and operating profit in BT Business by £296m, £96m and £87m (2012/13: £296, £107m and £95m). Within Other, central group functions revenue, EBITDA and operating profit reduced by £65m, £13m and £12m (2012/13: £47m, £11m and £14m). Intra-group eliminations on revenue decreased by £133m (2012/13: £121m). These organisational changes do not impact the results of BT Consumer, BT Wholesale or Openreach and there is no impact on the total group results, balance sheet or cash flows. Information regarding the results of each reportable segment is provided below.

Segment revenue and profit

BT Global Services BT Business BT Consumer BT Wholesale Openreach Other Total Year ended 31 March 2015 £m £m £m £m £m £m £m Segment revenue 6,779 3,145 4,285 2,157 5,011 74 21,451 Internal revenue (29) (399) (62) – (3,064) (46) (3,600) Revenue from external customersa 6,750 2,746 4,223 2,157 1,947 28 17,851 EBITDAb 1,047 1,041 1,031 561 2,600 (3) 6,277 Depreciation and amortisation (519) (180) (218) (224) (1,348) (49) (2,538) Operating profit (loss)a 528 861 813 337 1,252 (52) 3,739 Specific items (note 8) (253) Operating profit 3,486 Net finance expensec (643) Share of post tax loss of associates and joint ventures (1) Profit on disposal of interest in associates and joint ventures 25 Profit before tax 2,867

BT Global Services BT Business BT Consumer BT Wholesale Openreach Other Total Year ended 31 March 2014 (Restatedd) £m £m £m £m £m £m £m Segment revenue 7,269 3,213 4,019 2,422 5,061 82 22,066 Internal revenue (31) (415) (49) – (3,239) (45) (3,779) Revenue from external customers 7,238 2,798 3,970 2,422 1,822 37 18,287 EBITDAb 1,041 1,002 833 614 2,601 27 6,118 Depreciation and amortisation (616) (197) (219) (245) (1,406) (12) (2,695) Operating profita 425 805 614 369 1,195 15 3,423 Specific items (note 8) (276) Operating profit 3,147 Net finance expensec (618) Share of post tax loss of associates and joint ventures (3) Loss on disposal of interest in associates and joint ventures (4) Profit before tax 2,522

a Before specific items. b EBITDA is stated before specific items and is a non-GAAP measure provided in addition to the disclosure requirements defined under IFRS. The rationale for using non-GAAP measures is explained on pages 128 to 129. c Net finance expense includes specific item expense of £299m (2013/14: £235m, 2012/13: £119m). See note 8. d Restated, see above.

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4. Segment information continued BT Global Services BT Business BT Consumer BT Wholesale Openreach Other Total Year ended 31 March 2013 (Restatedd) £m £m £m £m £m £m £m Segment revenue 7,392 3,220 3,846 2,608 5,115 54 22,235 Internal revenue (35) (423) (44) – (3,368) (26) (3,896) Revenue from external customersa 7,357 2,797 3,802 2,608 1,747 28 18,339 EBITDAb 950 940 968 620 2,642 27 6,147 Depreciation and amortisation (634) (233) (248) (254) (1,428) (46) (2,843) Operating profit (loss)a 316 707 720 366 1,214 (19) 3,304 Specific items (note 8) (352) Operating profit 2,952 Net finance expensec (511) Share of post tax profit of associates and joint ventures 9 Profit on disposal of interest in associate and joint ventures 130 Profit before tax 2,580

a Before specific items. b EBITDA is stated before specific items and is a non-GAAP measure provided in addition to the disclosure requirements defined under IFRS. The rationale for using non-GAAP measures is explained on pages 128 to 129. c Net finance expense includes specific item expense of £299m (2013/14: £235m, 2012/13: £119m). See note 8. d Restated, see above.

Internal revenue and costs Intra group revenue generated from the sale of regulated products and services is based on market price. Intra group revenue from the sale of other products and services is agreed between the relevant lines of business and therefore line of business profitability can be impacted by transfer pricing levels. BT Wholesale does not generate internal revenue from the other lines of business. The majority of internal trading relates to Openreach and arises on rentals, and any associated connection or migration charges, of the UK access lines and other network products to the customer-facing lines of business. This occurs both directly, and also indirectly, through BT TSO which is included within the ‘Other’ segment. Internal revenue in BT Business relates primarily to IT services and BT Ireland. Internal revenue arising in BT Consumer relates primarily to employee broadband and wi-fi services. Internal revenue in BT Global Services relates primarily to conferencing services.

Internal cost recorded by BT Global Services BT Business BT Consumer BT Wholesale Openreach Other Total Year ended 31 March 2015 £m £m £m £m £m £m £m Internal revenue recorded by BT Global Services – 29 – – – – 29 BT Business 241 – 62 94 1 1 399 BT Consumer 20 22 – 2 – 18 62 BT Wholesale – – – – – – – Openreach 187 306 939 242 – 1,390 3,064 Other – – – – 46 – 46 Total 448 357 1,001 338 47 1,409 3,600

Internal cost recorded by BT Global Services BT Business BT Consumer BT Wholesale Openreach Other Total Year ended 31 March 2014 (Restateda) £m £m £m £m £m £m £m Internal revenue recorded by BT Global Services – 31 – – – – 31 BT Business 247 – 47 120 1 – 415 BT Consumer 13 18 – 3 – 15 49 BT Wholesale – – – – – – – Openreach 198 333 1,021 275 – 1,412 3,239 Other – – 3 – 42 – 45 Total 458 382 1,071 398 43 1,427 3,779

a Restated, see above.

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4. Segment information continued

Internal cost recorded by BT Global Services BT Business BT Consumer BT Wholesale Openreach Other Total Year ended 31 March 2013 (Restateda) £m £m £m £m £m £m £m Internal revenue recorded by BT Global Services – 35 – – – – 35 BT Business 247 – 55 110 3 8 423 BT Consumer 11 9 – 8 – 16 44 BT Wholesale – – – – – – – Openreach 198 386 1,097 275 – 1,412 3,368 Other – – 5 – 21 – 26 Total 456 430 1,157 393 24 1,436 3,896

a Restated, see above.

Revenue by products and services 2015 2014a 2013a Year ended 31 March £m £m £m ICT and managed networks 6,493 6,608 6,515 Broadband, TV and convergence 3,540 3,205 2,906 Calls and lines and connectivity 5,969 6,064 6,358 Transit 555 697 869 Other products and services 1,294 1,713 1,691 Revenueb 17,851 18,287 18,339

a Restated to present prior period information on a consistent basis. The impact in 2013/14 was to decrease ICT and managed networks revenue by £88m (2012/13: £103m), increase Broadband, TV and convergence revenue by £167m (2012/13: £167m) and decrease other products and services revenue by £79m (2012/13: £64m). b Before specific items.

Capital expenditure BT Global Services BT Business BT Consumer BT Wholesale Openreach Other Total Year ended 31 March 2015 £m £m £m £m £m £m £m Intangible assets 220 31 85 80 55 90 561 Property, plant and equipment 248 156 122 130 1,027 82 1,765 Capital expenditurea 468 187 207 210 1,082 172 2,326

BT Global b Services BT Business b BT Consumer BT Wholesale Openreach Other b Total Year ended 31 March 2014 £m £m £m £m £m £m £m Intangible assets 172 18 44 78 74 121 507 Property, plant and equipment 344 109 167 166 975 78 1,839 Capital expenditurea,b 516 127 211 244 1,049 199 2,346

a Net of government grants. b Restated, see note 1 and above.

Geographic information The UK is the group’s country of domicile and the group generates the majority of its revenue from external customers in the UK. The geographic analysis of revenue is on the basis of the country of origin in which the customer is invoiced.

Revenue from external customers 2015 2014 2013 Year ended 31 March £m £m £m UK 13,827 14,084 14,152 Europe, Middle East and Africa, excluding the UK 2,328 2,585 2,604 Americas 1,115 1,074 1,057 Asia Pacific 581 544 526 Revenuea 17,851 18,287 18,339

a Before specific items.

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4. Segment information continued Non-current assets 2015 2014 At 31 March £m £m UK 13,977 14,318 Europe, Middle East and Africa, excluding the UK 2,184 2,322 Americas 555 451 Asia Pacific 169 68 Non-current assets 16,885 17,159

Non-current assets, which exclude derivative financial instruments, investments and deferred tax assets, are based on the location of the assets.

5. Operating costs 2015 2014 2013 Year ended 31 March Notes £m £m £m Operating costs by nature Staff costs: Wages and salaries 3,568 3,730 3,872 Social security costs 440 444 443 Other pension costs 18 467 463 399 Share-based payment expense 19 70 60 64 Total staff costs 4,545 4,697 4,778 Own work capitalised (691) (600) (620) Net staff costs 3,854 4,097 4,158 Net indirect labour costsa 324 452 499 Net labour costs 4,178 4,549 4,657 Payments to telecommunications operators 2,144 2,472 2,677 Property and energy costs 968 959 1,022 Network operating and IT costs 605 591 587 TV programme rights charges 330 203 – Other operating costs 3,573 3,676 3,555 Other operating income (224) (281) (306) Depreciation of property, plant and equipment Owned assets 12 1,997 2,090 2,175 Held under finance leases 12 11 22 19 Amortisation of intangible assets 11 530 583 649 Total operating costs before specific items 14,112 14,864 15,035 Specific items 8 381 276 116 Total operating costs 14,493 15,140 15,151 Operating costs before specific items include the following: Leaver costsb 8 14 58 Research and development expenditurec 662 739 829 Operating lease charges 388 390 423 Foreign currency gains (2) – (6) Government grants (7) (10) (1)

a Net of capitalised indirect labour costs of £451m (2013/14: £396m, 2012/13: £346m). b Leaver costs are included within wages and salaries and social security costs, except for leaver costs of £237m (2013/14: £175m, 2012/13: £113m) associated with restructuring, which have been recorded as a specific item. c Research and development expenditure reported in the income statement includes amortisation of £490m (2013/14: £482m, 2012/13: £550m) in respect of internally developed computer software and operating expenses of £172m (2013/14: £257m, 2012/13: £279m). In addition, the group capitalised software development costs of £330m (2013/14: £273m, 2012/13: £265m).

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5. Operating costs continued Compensation of key management personnel Key management personnel comprise executive and non-executive directors and members of the Operating Committee of BT Group plc as well as the directors of the company. It is the BT Group plc Operating Committee which has responsibility for planning, directing and controlling the activities of the group. Compensation of key management personnel is shown in the table below:

2015 2014 2013 Year ended 31 March £m £m £m Short-term employee benefits 10.5 11.9 11.3 Post employment benefits 1.2 1.1 1.1 Share-based payments 6.1 6.9 6.3 Termination benefits 0.5 – – 18.3 19.9 18.7

Information concerning directors’ remuneration, pension entitlements and long-term incentive plans is shown in note 26.

6. Employees 2015 2014 2013 Year end Average Year end Average Year end Average Number of employees in the groupa 000 000 000 000 000 000 UK 70.9 72.2 72.2 72.7 73.2 74.1 Non-UK 17.6 16.5 15.6 15.1 14.7 15.0 Total employees 88.5 88.7 87.8 87.8 87.9 89.1

b b 2015 2014 2013 Year end Average Year end Average Year end Average Number of employees in the groupa 000 000 000 000 000 000 BT Global Services 18.1 19.2 22.7 22.1 21.4 22.0 BT Business 8.0 8.6 8.7 8.9 8.0 8.4 BT Consumer 6.2 6.0 6.0 6.2 6.6 6.4 BT Wholesale 1.5 1.7 1.8 1.8 2.0 1.4 Openreach 32.7 32.4 31.6 31.5 30.4 30.4 Other 22.0 20.8 17.0 17.3 19.5 20.5 Total employees 88.5 88.7 87.8 87.8 87.9 89.1

a These reflect the full-time equivalent of full and part-time employees. b Restated to reflect our internal reorganisation (see note 1).

7. Audit, audit related and other non-audit services The following fees were paid or are payable to the company’s auditors, PricewaterhouseCoopers LLP.

2015 2014 2013 Year ended 31 March £000 £000 £000 Fees payable to the company’s auditors and its associates for: Audit servicesa The audit of parent company and consolidated financial statements 2,882 2,578 2,633 The audit of the company’s subsidiaries 4,799 5,345 5,274 7,681 7,923 7,907 Audit related assurance servicesb 1,639 1,573 1,313

Other non-audit services Taxation compliance servicesc 350 260 472 Taxation advisory servicesd 401 371 370 All other assurance servicese 3,199 180 166 All other servicesf 570 829 933 4,520 1,640 1,941 Total services 13,840 11,136 11,161

a Services in relation to the audit of the parent company and the consolidated financial statements, including fees for reports under section 404 of the Sarbanes-Oxley Act. This also includes fees payable for the statutory audits of the financial statements of subsidiary companies. b Services in relation to other statutory filings or engagements that are required by law or regulation to be carried out by the appointed auditor. This includes fees for the audit of the group’s regulatory financial statements and reporting associated with the group’s US debt shelf registration and the issue of a Euro medium term note which took place during the year. c Services relating to tax returns, tax audits, monitoring and enquiries. d Fees payable for all taxation advisory services not falling within taxation compliance. e All other assurance services include fees payable to PricewaterhouseCoopers LLP as Reporting Accountants in relation to the shareholder circular published by the company’s ultimate parent company BT Group plc on 1 April 2015, in connection with its proposed acquisition of EE. f Fees payable for all non-audit services not covered above, principally comprising other advisory services.

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7. Audit, audit related and other non-audit services continued The BT Pension Scheme is an associated pension fund as defined in the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011. In the year ended 31 March 2015 PricewaterhouseCoopers LLP received total fees from the BT Pension Scheme of £2,481,000 (2013/14: £1,363,000, 2012/13: £1,395,000) in respect of the following services: audit of financial statements of associates £265,000 (2013/14: £220,000, 2012/13: £155,000); audit-related assurance services £10,000 (2013/14: £nil, 2012/13: £nil); taxation compliance services £374,000 (2013/14: £103,000, 2012/13: £123,000); taxation advisory services £227,000 (2013/14: £118,000, 2012/13: £95,000); and other non-audit services of £1,605,000 (2013/14: £922,000, 2012/13: £1,022,000).

8. Specific items 2015 2014 2013 Year ended 31 March £m £m £m Revenue Retrospective regulatory rulings (128) – 236 Operating costs Restructuring charges 315 276 204 Property rationalisation costs 45 – – Profit on disposal of property (67) – – Profit on disposal of businesses (6) – (7) Retrospective regulatory matters 75 – (142) EE related acquisition costs 19 – – Impairment charges – – 18 Provisions for claims – – 43 381 276 116 Net finance expense Interest expense on retirement benefit obligation 292 235 117 EE related financing costs 7 – – Interest on provisions for claims – – 2 299 235 119 Share of results of associates and joint ventures (Profit) loss on disposal of interest in associates and joint ventures (25) 4 (130) Net specific items charge before tax 527 515 341 Taxation Tax credit on specific items above (121) (111) (127) Tax credit on re-measurement of deferred tax – (208) (103) (121) (319) (230) Net specific items charge after tax 406 196 111

R­ etrospective regulatory rulings – in July 2014 the Supreme Court overturned a Court of Appeal judgment, made in July 2012, which had disallowed our ladder pricing policy relating to 0800, 0845 and 0870 calls from mobile phones terminating on our network. In 2012/13 we had recognised specific item charges of £85m and £58m against revenue and EBITDA respectively relating to this matter. In 2014/15 we recognised revenue and EBITDA of £128m, being the prior year impacts of ladder pricing agreements with the UK mobile operators following the Supreme Court judgment. Restructuring changes – the components of the restructuring charges recognised in 2014/15, 2013/14 and 2012/13 were: people and property charges of £294m (2013/14: £217m, 2012/13: £163m) principally comprising leaver costs of £237m, property exit costs and networks, products and procurement channels rationalisation charges of £21m (2013/14: £59m, 2012/13: £41m). Property rationalisation costs – we recognised a £45m charge increasing onerous lease provisions relating to the rationalisation of the group’s property portfolio. Profit on disposal of property – in February 2015 we disposed of a surplus building in London, Keybridge House, for a consideration of £93m resulting in a profit of £67m. Retrospective regulatory matters – in August 2014 the Competition Appeal Tribunal (CAT) handed down judgment on various appeals brought against a December 2012 Ofcom determination on the pricing of certain Ethernet products. We disagree with the CAT’s judgment and have applied for permission to appeal to the Court of Appeal. Ofcom had determined that BT had overcharged for certain services between 1 April 2006 and 31 March 2011 and required BT to make repayments. The CAT judged that BT should also pay interest on these amounts. Together with a review of our regulatory risk position in relation to other historical matters, we have recognised a specific item charge of £75m. In 2012/13 we had recognised charges of £151m and £36m against revenue and EBITDA respectively, following Ofcom’s determinations on historic Ethernet pricing.

802639 BT Group PLC.indb 78 5/19/2015 1:07:23 AM Notes to the consolidated financial statements 79

8. Specific itemscontinued EE related acquisition and financing costs – transaction costs of £19m were incurred relating to the planned acquisition of EE by the ultimate parent company and debt financing fees of £7m were incurred setting up a £3.6bn acquisition facility. Provisions for claims – the group makes provision for legal or constructive obligations arising from insurance, litigation and regulatory risks. Provisions increased by £43m in 2012/13 having reassessed potential claims relating to certain historical matters. Interest expense on retirement benefit obligations – see note 18 for more details. Profit or loss on disposal of interest in associates and joint ventures – in 2014/15 we recognised a £25m profit on the disposal of an associate, Accommodation Services Holdings, which was held at £nil cost. In 2012/13 we recognised a profit of £130m as a result of the disposal of the group’s remaining interest in its associate Tech Mahindra, which was held at a carrying value of £127m at 31 March 2012. Tax credit on re-measurement of deferred tax – see note 9 for more details.

9. Taxation Analysis of taxation expense for the year 2015 2014 2013 Year ended 31 March £m £m £m United Kingdom Corporation tax at 21% (2013/14: 23%, 2012/13: 24%) (702) (742) (708) Adjustments in respect of prior periods 35 10 277 Non-UK taxation Current (60) (65) (41) Adjustments in respect of prior periods 18 3 1 Total current tax expense (709) (794) (471) Deferred tax Origination and reversal of temporary differences 170 239 158 Adjustments in respect of prior periods (18) 4 (221) Impact of change in UK corporation tax rate (2013/14: 20%, 2012/13: 23%) – 208 103 Total deferred taxation credit 152 451 40 Total taxation expense (557) (343) (431)

Factors affecting taxation expense for the year The taxation expense on the profit for the year differs from the amount computed by applying the UK corporation tax rate to the profit before taxation as a result of the following factors: 2015 2014 2013 Year ended 31 March £m £m £m Profit before taxation 2,867 2,522 2,580 Expected taxation expense at UK rate of 21% (2013/14: 23%, 2012/13: 24%) (602) (580) (619) Effects of: Non-UK losses utilised 36 13 14 Non-deductible depreciation and amortisation (6) (12) (14) Non-deductible non-UK losses (37) (40) (46) (Higher) lower taxes on non-UK profits (9) (5) 10 Lower taxes on gain on disposal of business 7 – 28 Other deferred tax assets not recognised 9 54 36 Adjustments in respect of prior periods 35 17 57 Re-measurement of deferred tax balances – 208 103 Other 10 2 – Total taxation expense (557) (343) (431) ­­Exclude specific items (note 8) (121) (319) (230) Total taxation expense before specific items (678) (662) (661)

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9. Taxation continued Tax components of other comprehensive income 2015 2014 2013 Tax Tax Tax credit credit credit (expense) (expense) (expense) Year ended 31 March £m £m £m Tax on items that will not be reclassified to the income statement Actuarial losses relating to retirement benefit obligations 208 16 762 Tax on items that may be reclassified subsequently to the income statement Exchange differences on translation of foreign operations 13 (2) 10 Fair value movements on cash flow hedges – net fair value gains or losses 24 6 (25) – recognised in income and expense – – 39 245 20 786 Current tax credita 268 130 133 Deferred tax (expense) credit (23) (110) 653 245 20 786

a Includes £220m (2013/14: £122m, 2012/13: £128m) relating to actuarial losses arising from retirement benefit obligations.

Tax credit recognised directly in equity 2015 2014 2013 Year ended 31 March £m £m £m Tax credit relating to share-based payments 54 106 68

Deferred taxation Excess capital Retirement benefit Share-based Jurisdictional allowances obligationsa payments Other offset Total £m £m £m £m £m £m At 1 April 2013 1,418 (1,314) (184) (149) – (229) (Credit) expense recognised in the income statement (301) (174) 10 14 – (451) (Credit) expense recognised in other comprehensive income (2) 106 – 6 – 110 Credit recognised in equity – – (64) – – (64) Acquisitions – – – 3 – 3 At 31 March 2014 1,115 (1,382) (238) (126) – (631)

Non-current Deferred tax asset (93) (1,382) (238) (163) 416 (1,460) Deferred tax liability 1,208 – – 37 (416) 829 At 1 April 2014 1,115 (1,382) (238) (126) – (631) (Credit) expense recognised in the income statement (68) (113) 3 26 – (152) Expense recognised in other comprehensive income 6 12 – 5 – 23 Expense recognised in equity – – 149 – – 149 At 31 March 2015 1,053 (1,483) (86) (95) – (611)

Non-current Deferred tax asset (108) (1,483) (86) (124) 242 (1,559) Deferred tax liability 1,161 – – 29 (242) 948 At 31 March 2015 1,053 (1,483) (86) (95) – (611)

a Includes a deferred tax asset of £2m (2013/14: £1m) arising on contributions payable to defined contribution pension plans.

Deferred tax balances for which there is a right of offset within the same jurisdiction are presented net on the face of the group balance sheet as permitted by IAS 12, with the exception of deferred tax related to BT’s pension schemes which is disclosed within deferred tax assets. At 31 March 2015, all of the deferred tax asset of £1,559m (2013/14: £1,460m) and all of the deferred tax liability of £948m (2013/14: £829m) are expected to be recovered or settled after more than one year.

802639 BT Group PLC.indb 80 5/19/2015 1:07:23 AM Notes to the consolidated financial statements 81

9. Taxation continued Factors affecting future tax charges The rate of UK corporation tax changed from 21% to 20% on 1 April 2015. As deferred tax assets and liabilities are measured at the rates that are expected to apply in the periods of the reversal, deferred tax balances at 31 March 2014 were calculated using a rate of 20%. This resulted in a tax credit of £208m, which was treated as a specific item in the income statement (note 8) and a deferred tax expense of £288m in reserves for the year ending 31 March 2014. As all deferred tax balances were measured at 20% at 31 March 2014 and 31 March 2015, there was no further impact on deferred taxation for the year ending 31 March 2015.

Unrecognised tax losses and other temporary differences At 31 March 2015, the group had operating losses, capital losses and other temporary differences carried forward in respect of which no deferred tax assets were recognised amounting to £21.0bn (2013/14: £21.6bn). The group’s capital losses and other temporary differences have no expiry date restrictions. The expiry date of operating losses carried forward is dependent upon the tax law of the various territories in which the losses arose. A summary of expiry dates for losses in respect of which restrictions apply is set out below:

2015 At 31 March £m Expiry of losses Restricted losses Europe 356 2016–2034 Americas 10 2024–2034 Other 73 2016–2023 Total restricted losses 439 Unrestricted losses Operating losses 3,193 No expiry Capital losses 17,150 No expiry Total unrestricted losses 20,343 Other temporary differences 195 Total 20,977

At 31 March 2015, the undistributed earnings of non-UK subsidiaries were £8.1bn (2013/14: £8.3bn). No deferred tax liabilities have been recognised in respect of these unremitted earnings because the group is in a position to control the timing of any dividends from subsidiaries and hence any tax consequences that may arise.

10. Dividends A dividend of £1,200m (2013/14: £1,300m), equivalent to 13.8p per ordinary share (2013/14: 15.0p per share) was settled on 15 May 2014 in relation to the year ended 31 March 2014. This is disclosed in the group statement of changes in equity. The directors have declared a final dividend of £1,450m, which will be recognised as an appropriation of retained earnings in 2015/16. As the dividend was declared after 31 March 2015, no liability is recorded in these financial statements.

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11. Intangible assets Customer Internally relationships Telecoms developed Purchased Goodwill and brands licences and other software software Total £m £m £m £m £m £m Cost At 1 April 2013 1,418 358 481 3,304 1,245 6,806 Additions – – 1 433 73 507 Acquisition of subsidiaries (note 13) 15 20 – – – 35 Interest on qualifying assetsa – – – 1 – 1 Disposals and adjustments (12) 27 (62) (580) (41) (668) Exchange differences (82) (11) (5) (2) (15) (115) At 1 April 2014 1,339 394 415 3,156 1,262 6,566 Additions – – 1 488 72 561 Interest on qualifying assetsa – – – 2 – 2 Disposals and adjustments – – – (3) (9) (12) Transfers – – – 35 (46) (11) Exchange differences 65 5 (26) 2 (49) (3) At 31 March 2015 1,404 399 390 3,680 1,230 7,103

Accumulated amortisation At 1 April 2013 291 186 2,016 1,047 3,540 Charge for the year 15 7 468 93 583 Disposals and adjustments 26 (89) (543) (20) (626) Exchange differences (9) (3) (2) (12) (26) At 1 April 2014 323 101 1,939 1,108 3,471 Charge for the year 15 7 448 60 530 Disposals and adjustments – – (5) (6) (11) Transfers – – 18 (25) (7) Exchange differences (2) (12) 1 (45) (58) At 31 March 2015 336 96 2,401 1,092 3,925

Carrying amount At 31 March 2015 1,404 63 294 1,279 138 3,178 At 31 March 2014 1,339 71 314 1,217 154 3,095

a Additions to internally developed software in 2014/15 include interest capitalised at a weighted average borrowing rate of 6.0% (2013/14: 6.1%).

Goodwill impairment review The group performs an annual goodwill impairment review, based on its cash generating units (CGUs). The CGUs that have associated goodwill are BT Global Services, BT Business and BT Consumer. These are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other groups of assets, and to which goodwill is allocated. Goodwill is allocated to the group’s CGUs as follows:

BT Global Services BT Business BT Consumer Total Restateda Restateda £m £m £m £m At 1 April 2013 1,132 221 65 1,418 Acquisition (note 13) – – 15 15 Disposals and adjustments (12) – – (12) Exchange differences (75) (7) – (82) At 1 April 2014 1,045 214 80 1,339 Exchange differences 59 6 – 65 At 31 March 2015 1,104 220 80 1,404

a Due to the move of BT Conferencing from BT Business to BT Global Services (see notes 1 and 4), goodwill of £7m has been allocated from BT Business to BT Global Services on the basis of relative fair values. The discount rate used in performing the value in use calculation in 2014/15 was 9.3% (2013/14: 9.6%) for all CGUs. The perpetuity growth rate for BT Global Services was 2.2% (2013/14: 2.5%) and 2.0% (2013/14: 2.0%) for BT Business and BT Consumer.

802639 BT Group PLC.indb 82 5/19/2015 1:07:23 AM Notes to the consolidated financial statements 83

11. Intangible assets continued Recoverable amount The value in use of each CGU is determined using cash flow projections derived from financial plans approved by the BT Group plc Board covering a three-year period. They reflect management’s expectations of revenue, EBITDA growth, capital expenditure, working capital and operating cash flows, based on past experience and future expectations of business performance. Cash flows are also adjusted downwards to reflect the different risk attributes of each CGU. Cash flows beyond the three‑year period have been extrapolated using perpetuity growth rates.

Discount rate The pre-tax discount rates applied to the cash flow forecasts are derived from the group’s post-tax weighted average cost of capital. The assumptions used in the calculation of the group’s weighted average cost of capital are benchmarked to externally available data.

Growth rates The perpetuity growth rates are determined based on the long-term historical growth rates of the regions in which the CGU operates, and they reflect an assessment of the long-term growth prospects of that sector. The growth rates have been benchmarked against external data for the relevant markets. None of the growth rates applied exceed the long-term historical average growth rates for those markets or sectors.

Sensitivities There is significant headroom in all CGUs. For BT Global Services, the value in use exceeds the carrying value of the CGU by approximately £5,417m. The following changes (in combination) in assumptions would cause the recoverable amount to fall below the carrying value: ––reduction in the perpetuity growth rate from the 2.2% assumption applied to a revised assumption of 0% (no growth) ––an increase in the discount rate from the 9.3% assumption applied to a revised assumption of 15% or more ––shortfalls in trading performance against forecast resulting in operating cash flows decreasing by £180m or more in perpetuity. For BT Business and BT Consumer no reasonably possible changes in the key assumptions would cause the carrying amount of the CGUs to exceed the recoverable amount.

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12. property, plant and equipment Assets in course of Land and buildingsa Network infrastructurea Otherb construction Total £m £m £m £m £m Cost At 1 April 2013 1,260 45,266 2,199 718 49,443 Additionsc 34 205 119 1,487 1,845 Transfers 3 1,531 3 (1,537) – Disposals and adjustmentsd (80) (1,693) (370) (9) (2,152) Exchange differences (26) (239) (29) (9) (303) At 31 March 2014 1,191 45,070 1,922 650 48,833 Additionsc 12 106 159 1,482 1,759 Transfers 18 1,545 24 (1,576) 11 Disposals and adjustmentsd (51) (1,201) (263) (25) (1,540) Exchange differences (38) (365) (22) (4) (429) At 31 March 2015 1,132 45,155 1,820 527 48,634

Accumulated depreciation At 1 April 2013 747 32,716 1,900 – 35,363 Charge for the year 57 1,951 104 – 2,112 Disposals and adjustmentsd (82) (1,734) (356) – (2,172) Exchange differences (16) (204) (22) – (242) At 31 March 2014 706 32,729 1,626 – 35,061 Charge for the year 50 1,845 113 – 2,008 Disposals and adjustmentsd (41) (1,210) (257) – (1,508) Transfers – (6) 13 – 7 Exchange differences (28) (316) (21) – (365) At 31 March 2015 687 33,042 1,474 – 35,203

Carrying amount At 31 March 2015 445 12,113 346 527 13,431 Engineering stores – – – 74 74 Total at 31 March 2015 445 12,113 346 601 13,505 At 31 March 2014 485 12,341 296 650 13,772 Engineering stores – – – 68 68 Total at 31 March 2014 485 12,341 296 718 13,840

2015 2014 At 31 March £m £m The carrying amount of land and buildings, including leasehold improvements, comprised: Freehold 208 233 Leasehold 237 252 Total land and buildings 445 485

a The carrying amount of the group’s property, plant and equipment includes an amount of £36m (2013/14: £95m) in respect of assets held under finance leases, comprising land and buildings of £14m (2013/14: £60m) and network infrastructure of £22m (2013/14: £35m). The depreciation expense on those assets in 2014/15 was £11m (2013/14: £22m), comprising land and buildings of £3m (2013/14: £4m) and network infrastructure of £8m (2013/14: £18m). Within network infrastructure are assets with net book value of £7.4bn which have useful economic lives of more than 18 years. b Other mainly comprises motor vehicles, computers and office equipment. c Net of government grants of £392m (2013/14: £126m). d Fully depreciated assets in the group’s fixed asset registers were reviewed during the year, as part of the group’s annual asset verification exercise, and certain assets that were no longer in use have been written out, reducing cost and accumulated depreciation by £1.3bn (2013/14: £1.4bn).

13. Business combinations On 1 August 2013 the group acquired 100% of the issued share capital of ESPN Global Limited, together with certain trademarks, licences and programme rights. The purchase was made for consideration of £30m. Intangible assets of £14m and goodwill of £15m were recognised.

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14. programme rights Total £m At 1 April 2013 – Additions 311 Amortisation (203) At 1 April 2014 108 Additions 340 Amortisation (330) At 31 March 2015 118

Additions reflect TV programme rights for which the legally enforceable licence period has started during the year. Payments made for programme rights for which the legally enforceable licence period has not yet started are included within prepayments (see note 15). Programme rights commitments are disclosed in note 28. 15. Trade and other receivables 2015 2014 At 31 March £m £m Non-current Other assetsa 184 214

a Other assets includes costs relating to the initial set up, transition or transformation phase of long-term networked IT services contracts of £89m (2013/14: £72m) and prepayments and leasing debtors of £95m (2013/14: £142m). 2015 2014 At 31 March £m £m Current Trade receivables 1,454 1,370 Amounts owed by ultimate parent company 1 4 Prepayments 505 508 Accrued income 810 815 Other receivables 371 214 3,141 2,911

Trade receivables are stated after deducting allowances for doubtful debts, as follows: 2015 2014 £m £m At 1 April 192 218 Expense 78 77 Utilised (58) (98) Exchange differences (16) (5) At 31 March 196 192

Trade receivables are continuously monitored and allowances applied against trade receivables consist of both specific impairments and collective impairments based on the group’s historical loss experiences for the relevant aged category and taking into account general economic conditions. Historical loss experience allowances are calculated by line of business in order to reflect the specific nature of the customers relevant to that line of business. Trade and other receivables are classified as loans and receivables and held at amortised cost. The carrying amount of these balances approximates to fair value due to the short maturity of amounts receivable. Note 24 provides further disclosure regarding the credit quality of the group’s gross trade receivables. Trade receivables are due as follows: Past due and not specifically impaired Trade receivables specifically impaired net of Between 0 and Between 3 and Between 6 and Not past due provision 3 months 6 months 12 months Over 12 months Total At 31 March £m £m £m £m £m £m £m 2015 867 71 366 44 37 69 1,454 2014 857 39 300 31 43 100 1,370

Gross trade receivables which have been specifically impaired amounted to £159m (2013/14: £127m). Trade receivables not past due and accrued income are analysed below by line of business.

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15. Trade and other receivables continued Trade receivables not past due Accrued income 2015 2014a 2015 2014a At 31 March £m £m £m £m BT Global Services 517 535 405 448 BT Business 143 193 115 112 BT Consumer 119 106 85 – BT Wholesale 70 4 128 118 Openreach 15 12 75 137 Other 3 7 2 – Total 867 857 810 815

a Certain balances have been restated, see note 1.

Given the broad and varied nature of the group’s customer base, the analysis of trade receivables not past due and accrued income by line of business is considered the most appropriate disclosure of credit concentrations. Cash collateral held against trade and other receivables amounted to £4m (2013/14: £2m).

16. Trade and other payables 2015 2014 At 31 March £m £m Current Trade payables 2,835 2,745 Amounts owed to parent company 41 40 Amounts owed to ultimate parent company 5 8 Other taxation and social security 416 480 Other payables 510 519 Accrued expenses 414 444 Deferred income 1,076 1,047 5,297 5,283

2015 2014 At 31 March £m £m Non-currenta Other payables 855 845 Deferred income 73 53 928 898

a Non-current trade and other payables mainly relate to operating lease liabilities and deferred gains on a prior period sale and finance leaseback transaction, as well as estimates of potential re-investment or repayment of government grants received.

Trade and other payables are held at amortised cost. The carrying amount of these balances approximates to fair value due to the short maturity of amounts payable.

17. Provisions Restructuringa Propertyb Otherc Total £m £m £m £m At 1 April 2013 67 241 322 630 Income statement expense 20 4 17 41 Unwind of discount – 8 – 8 Utilised or released (28) (52) (61) (141) Exchange differences (1) – (4) (5) At 1 April 2014 58 201 274 533 Income statement expense 6 46 88 140 Unwind of discount – 8 – 8 Utilised or released (20) (38) (63) (121) Transfers – – 6 6 Exchange differences 1 – (3) (2) At 31 March 2015 45 217 302 564

2015 2014 At 31 March £m £m Analysed as: – Current 142 99 – Non-current 422 434 564 533

a Provisions relating to the group-wide restructuring programme. These are being utilised as the obligations are settled. b Property provisions mainly comprise onerous lease provisions arising from the rationalisation of the group’s property portfolio. The provisions will be utilised over the remaining lease periods, which range from one to 31 years. c Other provisions include amounts provided for legal or constructive obligations arising from insurance claims, litigation and regulatory risks which will be utilised as the obligations are settled. ­

802639 BT Group PLC.indb 86 5/19/2015 1:07:24 AM Notes to the consolidated financial statements 87

18. Retirement benefit plans Background The group has both defined benefit and defined contribution retirement benefit plans. The group’s main plans are in the UK and the largest by membership is the BT Pension Scheme (BTPS) which is a defined benefit plan that was closed to new entrants on 31 March 2001. After that date new entrants in the UK have been able to join a defined contribution plan, currently the BT Retirement Saving Scheme (BTRSS), a contract based arrangement.

Defined contribution plans A defined contribution plan is a pension arrangement under which the benefits are linked to contributions paid, the performance of each individual’s chosen investments and the form in which individuals choose to take their benefits. Contributions are paid into an independently administered fund. The income statement charge in respect of defined contribution plans represents the contribution payable by the group based upon a fixed percentage of employees’ pay. The company has no exposure to investment and other experience risks.

Defined benefit plans A defined benefit plan is a pension arrangement under which participating members receive a pension benefit at retirement determined by the plan rules dependent on factors such as age, years of service and pensionable pay and is not dependent upon actual contributions made by the company or members. The income statement service cost in respect of defined benefit plans represents the increase in the defined benefit liability arising from pension benefits earned by active members in the current period. The company is exposed to investment and other experience risks and may need to make additional contributions where it is estimated that the benefits will not be met from regular contributions, expected investment income and assets held.

Group income statement The expense or income arising from all group retirement benefit arrangements recognised in the group income statement is shown below.

2015 2014 2013 Year ended 31 March £m £m £m Recognised in the income statement before specific items Current service cost: – defined benefit plans 254 272 225 – defined contribution plans 176 151 136 Past service credit (5)a – – Administration expenses and Pension Protection Fund (‘PPF’) levy 42 40 38 Total operating expense 467 463 399 Net interest expense on net pensions deficit included in specific items (note 8) 292 235 117 Total recognised in the income statement 759 698 516

a Past service credit relates to various pension plans operating outside the UK.

Group statement of comprehensive income Remeasurements of the net defined benefit obligation are recognised in full in the group statement of comprehensive income in the year in which they arise. These comprise the impact on the defined benefit liability of changes in demographic and financial assumptions compared with the start of the year, actual experience being different to those assumptions and the return on plan assets above the amount included in the net pension interest expense.

Group balance sheet The net pension obligation in respect of defined benefit plans reported in the group balance sheet is set out below. 2014 2015 Present value Present value Assets of liabilities Deficit Assets of liabilities Deficit At 31 March £m £m £m £m £m £m BTPS 43,386 (50,715) (7,329) 39,939 (46,759) (6,820) Other plansa 241 (495) (254) 174 (376) (202) Retirement benefit obligation 43,627 (51,210) (7,583) 40,113 (47,135) (7,022) Adjustments due to effect of asset ceilingb – – Deferred tax asset 1,481 1,381 Net pension obligation (6,102) (5,641)

a I ncluded in the present value of liabilities of other plans is £80m (2013/14: £69m) related to unfunded pension arrangements. b There is no limiting effect of the asset ceiling as any accounting surplus arising is deemed to be recoverable due to the economic benefits available in the form of future refunds or reductions to future contributions.

At 31 March 2015 £9m (2013/14: £8m) of contributions to defined contribution plans were outstanding and are included within trade and other payables in the group balance sheet.

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18. Retirement benefit planscontinued Movements in defined benefit plan assets and liabilities The table below shows the movements on the plan assets and liabilities in the year and indicates where they are reflected in the financial statements.

Assets Liabilities Deficit £m £m £m At 1 April 2013 41,566 (47,422) (5,856) Current service cost – (272) (272) Interest on pension deficit 1,710 (1,945) (235) Settlements (63) 61 (2) Administration expenses and PPF levy (40) – (40) Included in the group income statement 1,607 (2,156) (549) Return on plan assets below the amount included in the group income statementa (1,453) – (1,453) Actuarial gain arising from changes in financial assumptionsb – 580 580 Actuarial loss arising from changes in demographic assumptionsb – – – c Actuarial loss arising from experience adjustments – (306) (306) Included in the group statement of comprehensive income (1,453) 274 (1,179) Regular contributions by employer 228 – 228 Deficit contributions by employer 325 – 325 Included in the group cash flow statement 553 – 553 Contributions by employees 12 (12) – Benefits paid (2,166) 2,166 – Foreign exchange (6) 15 9 Other movements (2,160) 2,169 9 At 31 March 2014 40,113 (47,135) (7,022) Current service cost – (254) (254) Interest on pension deficit 1,663 (1,955) (292) Past service credit – 5 5 Administration expenses and PPF levy (42) – (42) Included in the group income statement 1,621 (2,204) (583) Return on plan assets above the amount included in the group income statementa 3,083 – 3,083 Actuarial loss arising from changes in financial assumptionsb – (4,703) (4,703) Actuarial gain arising from changes in demographic assumptionsb – 126 126 c Actuarial gain arising from experience adjustments – 443 443 Included in the group statement of comprehensive income 3,083 (4,134) (1,051) Regular contributions by employer 178 – 178 Deficit contributions by employer 876 – 876 Included in the group cash flow statement 1,054 – 1,054 Contributions by employees 12 (12) – Benefits paid (2,231) 2,231 – Foreign exchange (25) 44 19 Other movements (2,244) 2,263 19 At 31 March 2015 43,627 (51,210) (7,583)

a The total actual return on plan assets in 2014/15 was a gain of £4,746m (2013/14: £257m). b The actuarial gain or loss arises from changes in the assumptions used to value the defined benefit liabilities at the end of the year compared with the assumptions used at the start of the year. This includes both financial assumptions, which are based on market conditions at the year end, and demographic assumptions such as life expectancy. c The actuarial loss or gain arising from experience adjustments on defined benefit liabilities represents the impact on the liabilities of differences between actual experience during the year compared with the assumptions made at the start of the year. Such differences might arise, for example, from members choosing different benefit options at retirement, actual salary increases being different from those assumed or actual benefit increases being higher than the inflation assumption.

802639 BT Group PLC.indb 88 5/19/2015 1:07:24 AM Notes to the consolidated financial statements 89

18. Retirement benefit plans continued BTPS At 31 March 2015 there were 306,500 members of the BTPS. Members belong to one of three sections depending upon the date they first joined the scheme. Section A is for members who joined before 1 December 1971, Section B is for members who joined the scheme between 1 December 1971 and 31 March 1986 and Section C is for members who joined the scheme on or after 1 April 1986 but before the scheme closed to new entrants on 31 March 2001. The membership is analysed below.

Number of Number of Number of Total At 31 March 2015 active members deferred members pensioners membership Sections A and Ba 15,000 32,000 176,000 223,000 Section C 23,000 40,500 20,000 83,500 Total 38,000 72,500 196,000 306,500

At 31 March 2014 Sections A and Ba 17,000 35,500 176,500 229,000 Section C 24,000 41,000 19,000 84,000 Total 41,000 76,500 195,500 313,000

a Section A and Section B memberships have been aggregated in this table as Section A members have typically elected to take Section B benefits at retirement.

Since 1 April 2009, when changes to member benefits and contribution rates were introduced, Section B and C members have accrued benefits based upon a career average re-valued earnings (CARE) basis and a normal pensionable age of 65. On a CARE basis benefits are built up based upon earnings in each year and the benefit accrued for each year is increased by the lower of inflation or the individual’s actual pay increase in each year to retirement. Benefits earned for pensionable service prior to 1 April 2009 are based upon a member’s final salary and a normal pensionable age of 60. Under the scheme rules the determination of the rate of inflation for statutory minimum rates of revaluation and indexation of benefits is based upon either the Retail Prices Index (RPI) or the Consumer Prices Index (CPI) which apply to each category of member as shown below.

Active members Deferred members Pensioners Section Ba Benefits accrue on a CARE basis Preserved benefits are revalued Increases in benefits in payment are increasing at the lower of RPI or the before retirement based upon CPI based upon CPI individual’s actual pay increase Section C Increases in benefits in payment are currently based upon RPI up to a maximum of 5%

a Section A members have typically elected to take Section B benefits at retirement.

Management of the scheme BT Pension Scheme Trustees Limited (the Trustee) has been appointed by BT as an independent trustee to administer and manage the scheme on behalf of the members in accordance with the terms of the Trust Deed of the scheme and relevant legislation. Under the terms of the Trust Deed there are nine Trustee directors all of whom are appointed by BT. The chairman of the Trustee is appointed after consultation with, and with the agreement of, the relevant trade unions who are also responsible for nominating four directors to act as representatives of the members. Of the remaining four directors, two will normally hold senior positions within the group, and two will normally hold (or have held) senior positions in commerce or industry. Subject to there being an appropriately qualified candidate, at least one of the Trustee directors is customarily a current pensioner or deferred pensioner of the BTPS. Trustee directors are usually appointed for a three-year term but are then eligible for re‑appointment.

BTPS assets Asset allocation The allocation of assets between different classes of investment is reviewed regularly and is a key factor in the Trustee’s investment policy. The allocations set reflect the Trustee’s views on the appropriate balance to be struck between seeking returns and incurring risk, and on the extent to which the assets should be distributed to match liabilities. Current market conditions and trends are regularly assessed which may lead to adjustments in the asset allocation. The BTPS also uses financial instruments to balance the asset allocation and to manage inflation risk, interest rate risk, liquidity risk and foreign currency risk. Under IAS 19 plan assets must be valued at the bid market value at the balance sheet date. For the main asset categories • securities listed on recognised stock exchanges are valued at closing bid prices • properties are valued on the basis of open market value • unlisted equities are valued in accordance with International Private Equity and Venture Capital (IPEVC) guidelines • unlisted fixed interest and index-linked instruments are valued using the latest market price or using discounted cash flow models that consider credit risk.

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18. Retirement benefit planscontinued The fair value of the assets of the BTPS analysed by asset category are shown below. These are subdivided by assets that have a quoted

market price in an active market and those that do not (such as investment funds). a a 2015 2014 of which of which b b Total assets quoted Total Total assets quoted Total At 31 March £bn £bn % £bn £bn % Equitiesc 13.1 10.6 30 11.2 5.8 28 Fixed-interest securities 7.4 5.7 17 7.1 5.7 18 Index-linked securities 11.7 10.5 27 9.9 8.5 24 Property 4.6 – 11 4.3 – 11 Alternative assetsd 6.2 – 14 7.1 1.0 18 Cash and other 0.4 – 1 0.3 – 1 Total 43.4 26.8 100 39.9 21.0 100

a  At 31 March 2015 and 31 March 2014, the Scheme’s assets did not include any directly held ordinary shares of the company. The Scheme held £9m (2013/14: £9m) of index-linked bonds issued by the group. b Assets with a quoted price in an active market. c  At 31 March 2015, the BTPS held £0.8bn of UK equities (2013/14: £2.6bn). d Alternative asset classes include commodities, private equity and credit opportunities.

Longevity insurance On 4 July 2014, the Scheme entered into arrangements to hedge around 25% of the Scheme’s exposure to potential improvements in longevity. These arrangements form part of the Scheme’s investment portfolio and will provide income to the Scheme in the event that pensions are paid out for longer than expected under the terms of the contract. To facilitate the transaction, the Trustee set up a wholly owned insurance company. The Scheme transferred longevity risk to this insurer, who has in turn reinsured this longevity risk with The Prudential Insurance Company of America, a U.S. based life insurance company. These arrangements required no additional cash contributions from BT. At 31 March 2015, the fair value of the insurance contract was negligible and has been included within cash and other assets.

Investment performance The Trustee reports on investment performance against a benchmark which is based on the asset mix and the market returns for each asset class. BTPS performance against the benchmark for the periods to 30 June 2014 was as follows. Over (under) Benchmark Actual BTPS performance Period ending 30 June 2014 % return % % 1 year 6.2 6.2 – 3 years 6.2 5.8 (0.4) 10 years 6.5 7.0 0.5

BTPS liabilities under IAS 19 Valuation methodology The liabilities of the BTPS are measured as the present value of the estimated future benefit cash flows to be paid by the Scheme, calculated using the projected unit credit method. These calculations are performed for the company by a professionally qualified independent actuary. The expected future benefit payments are based on a number of assumptions including future inflation, retirement ages, benefit options chosen and life expectancy and are therefore inherently uncertain. Actual benefit payments in a given year may be higher or lower, for example if members retire sooner or later than assumed, or take a greater or lesser cash lump sum at retirement. The estimated duration of BTPS liabilities, which is an indicator of the weighted average term of the liabilities, is around 15 years although the benefits payable by the BTPS are expected to be paid over more than 80 years as shown in the graph below. Whilst benefit payments are expected to increase over the earlier years, the value of the liabilities is expected to reduce.

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18. Retirement benefit planscontinued Forecast benets payable by the BTPS at 31 March 2015 (unaudited)

£bn £bn 3.0 60 a

TPS 2.5 50

2.0 40 a able by the B 1.5 30 Liabilities 1.0 20

ecast benets pay 0.5 10 r Fo 0 0 2015 2035 2055 2075 2095

Forecast bene t payments (Left axis) Liabilities (Right axis) a Based on accrued benets to date.

Key assumptions – IAS 19 The key financial assumptions used to measure the liabilities of the BTPS under IAS 19 are shown below.

a Nominal rates (per year) Real rates (per year) 2015 2014 2013 2015 2014 2013 At 31 March % % % % % %

Rate used to discount liabilities 3.25 4.25 4.20 0.39 0.97 0.87 Inflation – increase in RPI 2.85 3.25 3.30 – – – Inflation – increase in CPI 1.85b 2.50c 2.55c (1.0)b (0.75)c (0.75)c a The real rate is calculated relative to RPI inflation and is shown as a comparator. b Assumed to be 0.2% lower after 31 March 2017. c Assumed to be 0.45% lower after 31 March 2016.

Rate used to discount liabilities IAS 19 requires that the discount rate is determined by reference to market yields at the reporting date on high quality corporate bonds. The currency and term of these should be consistent with the currency and estimated term of the pension obligations. The discount rate at 31 March 2015 is based on a market-based AA corporate bond yield curve allowing for the future expected benefit payments from the BTPS.

Inflation – increases in RPI and CPI Salary increases are assumed to be aligned with CPI inflation whilst benefits are assumed to increase by either RPI or CPI inflation as prescribed by the rules of the BTPS and summarised above. The assumption for RPI has been assessed by reference to yields on long-term fixed and index-linked Government bonds and Bank of England published inflationary expectations. CPI is assessed at a margin below RPI taking into account market forecasts and independent estimates of the long-term difference.

Longevity The average life expectancy assumptions, after retirement at 60 years of age, are as follows. 2015 2014 Number of Number of At 31 March years years Male in lower pay bracket 26.0 26.0 Male in medium pay bracket 27.3 27.7 Male in higher pay bracket 28.7 Female in lower pay bracket 28.7 28.5 Female in higher pay bracket 29.0 Average improvement for a member retiring at age 60 in 10 years’ time 1.0 1.0

The assumptions about life expectancy have regard to information published by the UK actuarial profession’s Continuous Mortality Investigation. However, due to the size of the membership of the BTPS it is considered appropriate for the adopted life expectancy assumptions to take into account the actual membership experience of the scheme. Allowance is also made for future improvements in mortality. The BTPS actuary undertakes formal reviews of the membership experience at every triennial valuation.

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18. Retirement benefit planscontinued Sensitivity analysis of the principal assumptions used to measure BTPS liabilities The assumptions on the discount rate, inflation, salary increases and life expectancy all have a significant effect on the measurement of scheme liabilities. The table below provides an indication of the sensitivity of the IAS 19 pension liabilities at 31 March 2015, and of the income statement charge for 2015/16, to changes in these assumptions. There may also be a move in the assets from changes in conditions. The total expected impact to liabilities and assets is illustrated as the sensitivity of the deficit. For example, the life expectancy scenario incorporates the expected movement in the value of the longevity hedge. Decrease Decrease Decrease (increase) in (increase) in (increase) in liability deficit service cost £bn £bn £m 0.25 percentage point increase to: – discount rate 1.9 1.2a 10 – inflation rate (assuming RPI, CPI and salary increases all move by 0.25 percentage points) (1.5) (0.5)b (10) – CPI inflation rate (assuming RPI and salary increases are unchanged) (1.0) (1.0) (5) – salary increases (assuming RPI and CPI are unchanged) (0.2) (0.2) (5) Additional one year increase to life expectancy (1.3) (1.0) (5)

a Allows for the estimated impact on assets from a 0.25% per year increase to interest rates and corporate bond yields, with credit spreads unchanged. b Allows for the estimated impact on assets directly linked to inflation from a 0.25% per year increase to inflation.

BTPS funding Triennial funding valuation The triennial valuation is carried out for the Trustee by a professionally qualified independent actuary. The purpose of the valuation is to design a funding plan to ensure that the Scheme has sufficient funds available to meet future benefit payments. The latest funding valuation was performed as at 30 June 2014. The next funding valuation will have an effective date of no later than 30 June 2017. The valuation methodology for funding purposes, which is based on prudent assumptions, is broadly as follows: • assets are valued at market value at the valuation date; and • liabilities are measured on an actuarial funding basis using the projected unit credit method and discounted to their present value. The results of the two most recent triennial valuations are shown below. June June 2014 2011 valuation valuation £bn £bn BTPS liabilities (47.2) (40.8) Market value of BTPS assets 40.2 36.9 Funding deficit (7.0) (3.9) Percentage of accrued benefits covered by BTPS assets at valuation date 85.2% 90.4% Percentage of accrued benefits on a solvency basis covered by the BTPS assets at the valuation date 63.0% 66.0%

The funding deficit increased to £7.0bn at 30 June 2014. While deficit contribution payments totalling £2.65bn and investment returns of 5.8% per year since the 2011 valuation contributed to higher assets at the 2014 valuation date, the low interest rate environment resulted in a higher value being placed on the Scheme’s liabilities which more than offset the improvements in the Scheme’s assets.

Key assumptions – funding valuation These valuations were determined using the following prudent long-term assumptions.

a Nominal rates (per year) Real rates (per year) June 2014 June 2011 June 2014 June 2011 valuation valuation valuation valuation % % % % Average single equivalent discount rate 4.5 5.2 1.0 2.0 Average long-term increase in RPI 3.5 3.2 – – Average long-term increase in CPI 2.5 2.2 (1.0) (1.0)

a The real rate is calculated relative to RPI inflation and is shown as a comparator.

In line with developing market practice and reflecting a more sophisticated methodology, the discount rate at 30 June 2014 has been derived from prudent return expectations above a yield curve based on gilt and swap rates. The discount rate reflects views of future returns at the valuation date. This gives a prudent discount rate of 2.1% per year above the yield curve initially, trending down to 0.6% per year above the curve in the long-term. The assumption is equivalent to using a flat discount rate of 4.5% per year.

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18. Retirement benefit planscontinued The average life expectancy assumptions at the 2014 valuation date, for members 60 years of age, are as follows. June June 2014 2011 Number of years from 30 June 2014 assumptions assumptions Male in lower pay bracket 26.1 26.3 Male in medium pay bracket 27.5 28.1 Male in high pay bracket 29.0 Female in lower pay bracket 28.9 28.7 Female in high pay bracket 29.2 Average improvement for a member retiring at age 60 in 10 years’ time 1.3 1.2

Payments made to the BTPS 2015 2014 Year ended 31 March £m £m Ordinary contributions 168 205 Deficit contributions 875 325 Total contributions in the year 1,043 530

The group made a deficit contribution payment of £625m in April 2015 and expects to make further contributions of approximately £510m to the BTPS in 2015/16, comprising ordinary contributions of approximately £260m and deficit contributions of £250m.

Future funding obligations and recovery plan Under the terms of the Trust Deed, the group is required to have a funding plan, determined at the conclusion of the triennial funding valuation, which is a legal agreement between BT and the Trustee and should address the deficit over a maximum period of 20 years. In January 2015, the 2014 triennial funding valuation was finalised, agreed with the Trustee and certified by the Scheme Actuary. The funding deficit at 30 June 2014 was £7.0bn. Under the associated recovery plan BT made payments of £875m in March 2015 and £625m in April 2015. BT will make future deficit payments in line with the table below.

Year to 31 March 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Deficit contribution (£m) 250 250 688 699 711 724 670 670 670 495 495 495 495 495 289

The ordinary contribution rate to meet the benefits of current employed members increased from 13.5% to 16.0% of pensionable salaries (including employee contributions) from 1 April 2015 through to the next valuation date.

Other protections The 2014 funding agreement with the Trustee included additional features for BT to provide support to the Scheme. These include:

Feature Detail Shareholder In the event that shareholder distributions exceed an agreed threshold, BT will provide matching payments to the Scheme. distributions The threshold allows for 15% per year dividend per share growth plus £300m per year of share buybacks on a cumulative basis. BT will consult with the Trustee if it considers share buybacks in excess of £300m per year or making a special dividend. These provisions apply from 29 January 2015 until 31 March 2019, or until the finalisation of the next valuation if earlier. Material corporate In the event that BT generates net cash proceeds greater than £1bn from disposals (net of acquisitions) in any 12-month events period, BT will make additional contributions to the Scheme equal to one third of those net cash proceeds. BT will consult with the Trustee if: – it considers making acquisitions with a total cost of more than £1bn in any 12-month period; or – it considers making disposals of more than £1bn; or – it considers making a Class 1 transaction (acquisition or disposal); or – it is subject to a takeover offer. BT will advise the Trustee should there be other material corporate events which may impact BT’s covenant to the Scheme. These provisions apply from 29 January 2015 until 31 March 2019, or until the finalisation of the next valuation if earlier. Negative pledge A negative pledge that future creditors will not be granted superior security to the Scheme in excess of a £1.5bn threshold, to cover both British Telecommunications plc and BT Group plc. This provision applies until the deficit reduces to below £2.0bn at any subsequent funding valuation.

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18. Retirement benefit plans continued In the unlikely event that the group were to become insolvent there are additional protections of BTPS members’ benefits:

Feature Detail Crown Guarantee The Crown Guarantee was granted by the Government when the group was privatised in 1984 and would only come into effect upon the insolvency of BT. The Trustee brought court proceedings to clarify the scope and extent of the Crown Guarantee. The Court of Appeal judgment on 16 July 2014 established that: – the Crown Guarantee covers BT’s funding obligation in relation to members of the Scheme who joined post-privatisation as well as those who joined pre-privatisation (subject to certain exceptions); – the funding obligation to which the Crown Guarantee relates is measured with reference to BT’s obligation to pay deficit contributions under the rules of the Scheme. The Crown Guarantee is not taken into account for the purposes of the actuarial valuation of the Scheme and is an entirely separate matter, only being relevant in the highly unlikely event that BT became insolvent. Pension Protection The Pension Protection Fund (PPF) may take over the Scheme and pay benefits to members not covered by the Crown Fund (PPF) Guarantee. There are limits on the amounts paid by the PPF and this would not give exactly the same benefits as those provided by the Scheme. Other benefit plans In addition to the BTPS, the group maintains benefit plans in most other countries with a focus on these being appropriate for the local market and culture. After the BTPS, the largest defined benefit plan sponsored by the group is a plan in the Netherlands with liabilities of around £180m. The BT Retirement Saving Scheme (BTRSS) is the largest defined contribution scheme maintained by the group with around 29,000 active members. In the year to 31 March 2015, the group contributed £105m to the BTRSS.

19. Share-based payments Overview The ultimate parent company, BT Group plc, has savings-related share option plans for its employees and those of participating subsidiaries, further share option plans for selected employees and a stock purchase plan for employees in the US. It also has several share plans for executives. All share-based payment plans are equity settled instruments of BT Group plc and details of these plans and an analysis of the total charge by type of award are set out below. 2015 2014 2013 Year ended 31 March £m £m £m Employee Saveshare Plans 25 25 25 Executive Share Plans: Incentive Share Plan (ISP) 32 21 27 Deferred Bonus Plan (DBP) 9 11 10 Other plans 4 3 2 70 60 64

Employee Saveshare Plans Under an HMRC approved savings-related share option plan employees save on a monthly basis, over a three or five-year period, towards the purchase of shares at a fixed price determined when the option is granted. This price is usually set at a 20% discount to the market price for five-year plans and 10% for three-year plans. The options must be exercised within six months of maturity of the savings contract, otherwise they lapse. Similar plans operate for BT’s overseas employees.

Incentive Share Plan (ISP) Under the ISP, participants are only entitled to these shares in full at the end of a three-year period if BT Group plc has met the relevant pre-determined corporate performance measures and if the participants are still employed by the group. For ISP awards granted in 2014/15, 2013/14 and 2012/13: 40% of each award is linked to a total shareholder return target (TSR) for a comparator group of companies from the beginning of the relevant performance period; 40% is linked to a three-year cumulative free cash flow measure, and 20% to growth in underlying revenue excluding transit.

Deferred Bonus Plan (DBP) Under the DBP, awards are granted annually to selected employees of the group. Shares in BT Group plc are transferred to participants at the end of three years if they continue to be employed by the group throughout that period. In accordance with the terms of the ISP and DBP, dividends or dividend equivalents earned on shares during the conditional periods are reinvested in shares of BT Group plc for the potential benefit of the participants.

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19. Share-based payments continued­ Employee Saveshare Plans Movements in Employee Saveshare options are shown below.

Movement in the number of share options Weighted average exercise price 2015 2014 2013 2015 2014 2013 Year ended 31 March millions millions millions pence pence pence Outstanding at 1 April 459 490 561 102 91 79 Granted 81 40 66 326 257 176 Forfeited (9) (10) (10) 239 158 120 Exercised (304) (57) (119) 65 110 69 Expired (1) (4) (8) 163 78 188 Outstanding at 31 March 226 459 490 226 102 91 Exercisable at 31 March – 2 – 74 111 –

The weighted average share price for all options exercised during 2014/15 was 382p (2013/14: 356p, 2012/13: 221p). The following table summarises information relating to options outstanding and exercisable under Employee Saveshare plans at 31 March 2015.

Weighted Number of Weighted Exercise average outstanding average price exercise options remaining Normal dates of vesting and exercise (based on calendar years) per share price millions contractual life 2015 104p – 189p 135p 61 10 months 2016 156p – 280p 205p 33 22 months 2017 168p – 359p 236p 54 34 months 2018 249p – 319p 251p 22 46 months 2019 319p 319p 56 58 months Total 226p 226 32 months

GSOP and GLOP (Legacy Executive Plans) During 2014/15 1m (2013/14: 9m, 2012/13: 12m) options were exercised, nil (2013/14: nil, 2012/13: 1m) options expired and nil (2013/14: nil, 2012/13: nil) options were forfeited under former executive share option plans (GSOP and GLOP). There were no options outstanding at 31 March 2015.

Executive share plans Movements in executive share plan awards during 2014/15 are shown below: Number of shares (millions) ISP DBP Total At 1 April 2014 70 13 83 Awards granted 16 3 19 Awards vested (20) (5) (25) Awards lapsed (11) – (11) Dividend shares reinvested 2 – 2 At 31 March 2015 57 11 68

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19. Share-based payments continued Fair values The following table summarises the fair values and key assumptions used for valuing grants made under the Employee Saveshare plans and ISP in 2014/15, 2013/14 and 2012/13.

2015 2014 2013 Employee Employee Employee Year ended 31 March Saveshare ISP Saveshare ISP Saveshare ISP Weighted average fair value 82p 309p 61p 269p 43p 170p Weighted average share price 387p 393p 310p 315p 209p 204p Weighted average exercise price 326p n/a 257p n/a 176p n/a Expected dividend yield 3.5% – 3.8% n/a 3.9% – 5.6% n/a 3.6% – 5.2% n/a Risk free rates 1.2% – 2.0% 1.2% 0.7% – 1.5% 0.7% 0.3% – 0.8% 0.4% Expected volatility 22.2% – 24.9% 24.3% 23.3% – 31.9% 32.0% 28.1% – 36.5% 33.6%

Employee Saveshare grants are valued using a Binomial options pricing model. Awards under the ISP are valued using Monte Carlo simulations. TSRs are generated for BT Group plc and the comparator group at the end of the three-year performance period, using each company’s volatility and dividend yield, as well as the cross correlation between pairs of stocks. Volatility has been determined by reference to BT’s historical volatility which is expected to reflect the BT Group plc share price in the future. An expected life of three months after vesting date is assumed for Employee Saveshare options and for all other awards the expected life is equal to the vesting period. The risk-free interest rate is based on the UK gilt curve in effect at the time of the grant, for the expected life of the option or award. The fair values for the DBP were determined using the market price of the shares at the date of grant. The weighted average share price for DBP awards granted in 2014/15 was 393p (2013/14: 315p, 2012/13: 203p).

20. Investments 2015 2014 At 31 March £m £m Non-current assets Available-for-sale 36 25 Amounts owed by ultimate parent company 1,307 1,225 Amounts owed by parent company 18,263 17,587 Fair value through profit and loss 8 9 19,614 18,846 Current assets Available-for-sale 3,133 1,774 Amounts owed by ultimate parent company 3 15 Amounts owed by parent company 45 763 Loans and receivables 390 – 3,571 2,552

Loans and receivables are held on balance sheet at amortised cost, and this approximates to fair value. Loans and receivables consist of investments in term deposits denominated in Sterling £360m (2013/14: £nil) and in US Dollars of £30m (2013/14: £nil).

Amounts owed by parent and ultimate parent company mainly consist of Sterling denominated loans which earn a floating rate of interest based upon LIBOR. These are held at amortised cost and this approximates fair value. Further details of these amounts are disclosed in note 27.

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20. Investments continued Fair value hierarchy Level 1 Level 2 Level 3 Total At 31 March 2015 £m £m £m £m Non-current and current investments Available-for-sale investments 26 3,133 10 3,169 Fair value through profit or loss 8 – – 8 Total 34 3,133 10 3,177

Level 1 Level 2 Level 3 Total At 31 March 2014 £m £m £m £m Non-current and current investments Available-for-sale investments 18 1,774 7 1,799 Fair value through profit or loss 9 – – 9 Total 27 1,774 7 1,808

The three levels of valuation methodology used are: Level 1 – uses quoted prices in active markets for identical assets or liabilities Level 2 – uses inputs for the asset or liability other than quoted prices, that are observable either directly or indirectly Level 3 – uses inputs for the asset or liability that are not based on observable market data, such as internal models or other valuation methods.

Level 1 balances consist of available-for-sale investments of £26m (2013/14: £18m) and listed investments of £8m (2013/14: £9m) designated at fair value through profit and loss.

Level 2 balances classified as available-for-sale consist of investments in funds denominated in Sterling of £2,784m (2013/14: £1,774m) and in Euros of £349m (2013/14: £nil).

Level 3 balances consist of available-for-sale investments of £10m (2013/14: £7m) which represent investments in a number of private companies. In the absence of specific market data, these investments are held at cost, adjusted as necessary for impairments, which approximates to fair value. A gain of £8m was recognised in the income statement in respect of Level 3 assets disposed of during 2014/15 (2013/14: £nil).

21. Cash and cash equivalents 2015 2014 At 31 March £m £m Cash at bank and in hand 330 375 Cash equivalents Loans and receivables US deposits 28 55 UK deposits 28 257 Other deposits 43 3 Total cash equivalents 99 315 Total cash and cash equivalents 429 690 Bank overdrafts (note 22) (27) (11) Cash and cash equivalents per the cash flow statement 402 679

The group has cross undertaking guarantee facilities across certain bank accounts which allow a legally enforceable right of set-off of the relevant cash and overdraft balances on bank accounts included within each scheme. The group’s cash and cash equivalents included restricted cash of £143m (2013/14: £109m), of which £140m (2013/14: £106m) was held in countries in which prior approval is required to transfer funds abroad. Such funds can be used by the group within a reasonable period of time if it complies with these requirements. The remaining balance of £3m (2013/14: £3m) was held in escrow accounts. Cash and cash equivalents are classified as loans and receivables and are held on the balance sheet at amortised cost which equates to fair value.

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22. loans and other borrowings Capital management policy The capital structure is managed by BT Group plc, the ultimate parent of the group. Its capital management policy is set out in the Report of the Directors on page 55.

Loans and borrowings 2015 2014 At 31 March £m £m 5.25% €750m bond due June 2014a – 645 6.125% €600m bond due July 2014a,b – 518 2.00% US$750m bond due June 2015a 508 452 6.50% €1,000m bond due July 2015a 758 867 1.625% US$600m bond due June 2016a 406 361 8.50% £683m bond due December 2016 (minimum 7.50%d) 695 699 1.25% US$500m bond due February 2017a 337 300 6.625% £500m bond due June 2017a 525 526 5.95% US$1,100m bond due January 2018a 750 668 2.35% US$800m bond due February 2019a 541 481 1.125% €1,000m bond due June 2019 730 – 8.625% £300m bond due March 2020 299 299 3.50% £250m index linked bond due April 2025 392 382 5.75% £600m bond due December 2028c 751 670 9.625% US$2,670m bond due December 2030a (minimum 8.625%d) 1,850 1,648 6.375% £500m bond due June 2037a 522 522 Total listed bonds 9,064 9,038 Finance leases 238 264 Commercial papere – 324 Other loans 439 177 Bank overdrafts 27 11 Amounts due to ultimate parent companyf 1,004 – Total other loans and borrowings 1,470 512 Total loans and borrowings 10,772 9,814

a Designated in a cash flow hedge relationship. b The interest rate payable on this bond attracts an additional 1.25% for a downgrade by one credit rating category by either or both Moody’s and S&P below Baa3/BBB-, respectively. c Designated in a fair value hedge relationship. d The interest rate payable on this bond attracts an additional 0.25% for a downgrade by one credit rating by either Moody’s or S&P to the group’s senior unsecured debt below A3/A- respectively. In addition, if Moody’s or S&P subsequently increase the ratings then the interest rate will be decreased by 0.25% for each rating category upgrade by each rating agency. In no event will the interest rate be reduced below the minimum rate reflected in the above table. e Commercial paper of £nil (2013/14: £237m) is denominated in Euros and of £nil (2013/14: £87m) in US Dollars. f Amounts due to ultimate parent company are denominated in Sterling and incur a floating rate of interest based on LIBOR.

802639 BT Group PLC.indb 98 5/19/2015 1:07:25 AM Notes to the consolidated financial statements 99

22. loans and other borrowings continued Unless designated in a fair value hedge relationship, all loans and other borrowings are carried in the group balance sheet and table above at amortised cost. The fair value of listed bonds is £10,919m (2013/14: £10,597m) and the fair value of finance leases is £273m (2013/14: £286m). The fair value of the group’s bonds and other long-term borrowings is estimated on the basis of quoted market prices, based on the same or similar issues, where they exist. Where the same or similar issues do not exist, the fair value is estimated based on the calculation of future cash flows using blended discount rates in effect at the balance sheet date. The fair value measurement is categorised at Level 2 of the fair value hierarchy as defined in note 20. The carrying amount of commercial paper, other loans and bank overdrafts equates to fair value due to the short maturity of these items. The interest rates payable on loans and borrowings disclosed above reflect the coupons on the underlying issued loans and borrowings and not the interest rates achieved through applying associated cross-currency and interest rate swaps in hedge arrangements. Loans and other borrowings are analysed as follows: 2015 2014 At 31 March £m £m Current liabilities Listed bonds 1,422 1,349 Finance leases 13 14 Commercial paper – 324 Other loans and bank overdrafts 465 186 Amount due to ultimate parent company 2 – Total current liabilities 1,902 1,873 Non-current liabilities Listed bonds 7,642 7,689 Finance leases 225 250 Other loans and borrowings 1 2 Amounts due to ultimate parent company 1,002 – Total non-current liabilities 8,870 7,941 Total 10,772 9,814

The carrying values disclosed in the above table reflect balances at amortised cost adjusted for accrued interest and current fair value adjustments to the relevant loans or borrowings. These do not reflect the final principal repayments that will arise after taking account of the relevant derivatives in hedging relationships which are reflected in the table below. Apart from finance leases, all borrowings as at 31 March 2015 and 2014 were unsecured. The principal repayments of loans and borrowings at hedged rates amounted to £10,078m (2013/14: £9,496m) and repayments fall due as follows:

2015 2014 Carrying effect of hedging Principal repayments Carrying Effect of hedging Principal repayments amount and interesta at hedged rates amount and interesta at hedged rates At 31 March £m £m £m £m £m £m Within one year, or on demand 1,902 (152) 1,750 1,873 (183) 1,690 Between one and two years 1,431 (48) 1,383 1,291 (7) 1,284 Between two and three years 1,251 (191) 1,060 1,353 36 1,389 Between three and four years 549 (51) 498 1,172 (111) 1,061 Between four and five years 1,033 89 1,122 492 7 499 After five years 4,463 (198) 4,265 3,572 1 3,573 Total due for repayment after more than one year 8,727 (399) 8,328 7,880 (74) 7,806 Total repayments 10,629 (551) 10,078 9,753 (257) 9,496 Fair value adjustments for hedged risk 143 61 Total loans and other borrowings 10,772 9,814

a Adjustments for hedging and interest reflect the impact of the currency element of derivatives and adjust the repayments to exclude interest recognised in the carrying amount.

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22. loans and other borrowings continued Obligations under finance leases are analysed as follows:

2015 2014 2015 2014 Repayment of outstanding Minimum lease payments lease obligations At 31 March £m £m £m £m Amounts payable under finance leases: Within one year 29 31 13 14 In the second to fifth years inclusive 101 111 46 51 After five years 269 307 179 199 399 449 238 264 Less: future finance charges (161) (185) – – Total finance lease obligations 238 264 238 264

Assets held under finance leases mainly consist of buildings and network assets. The group’s obligations under finance leases are secured by the lessors’ title to the leased assets.

23. Finance expense and income 2015 2014 2013 Year ended 31 March £m £m £m Finance expense Interest on: Financial liabilities at amortised cost 516 560 623 Finance leases 15 16 19 Derivatives 7 13 5 Fair value movements: Bonds designated as hedged items in fair value hedges 82 (47) 31 Derivatives designated as hedging instrument in fair value hedges (82) 47 (31) Derivatives not in a designated hedge relationship 7 (2) 6 Reclassification of cash flow hedge from other comprehensive income 26 9 12 Unwinding of discount on provisions 8 8 6 Interest payable on ultimate parent company borrowings 2 – – Finance expense 581 604 671 Less: interest capitalised at weighted average rate of 6.0% (2013/14: 6.1%, 2012/13: 6.1%) (2) (1) (5) Total finance expense before specific items 579 603 666 Specific items (note 8) 299 235 119 Total finance expense 878 838 785

2015 2014 2013 Year ended 31 March £m £m £m Finance income Interest on available-for-sale investments 8 5 7 Interest on loans and receivables 9 7 6 Interest income on loans to immediate and ultimate parent company 218 208 261 Total finance income 235 220 274

2015 2014 2013 Year ended 31 March £m £m £m Net finance expense before specific items 344 383 392 Specific items (note 8) 299 235 119 Net finance expense 643 618 511

802639 BT Group PLC.indb 100 5/19/2015 1:07:25 AM Notes to the consolidated financial statements 101

24. Financial instruments and risk management Risk management is performed by BT Group plc, the ultimate parent company. The group issues or holds financial instruments mainly to finance its operations; to finance corporate transactions such as dividends, share buybacks and acquisitions; for the temporary investment of short-term funds; and to manage the currency and interest rate risks arising from its operations and from its sources of finance. In addition, various financial instruments, for example trade receivables and trade payables, arise directly from the group’s operations.

Financial risk management The group’s activities expose it to a variety of financial risks: market risk (including interest rate risk and foreign exchange risk); credit risk and liquidity risk.

Treasury operations The group has a centralised treasury operation whose primary role is to manage liquidity and funding requirements and the group’s exposure to associated financial and market risks, including credit risk, interest rate risk and foreign exchange risk.

Treasury policy Treasury policy is set by the BT Group plc Board. Group treasury activities are subject to a set of controls appropriate for the magnitude of the borrowing, investments and group-wide exposures. The BT Group plc Board has delegated its authority to operate these policies to a series of panels that are responsible for the management of key treasury risks and operations. Appointment to and removal from the key panels requires approval from two of the following: the Chairman, the Chief Executive or the Group Finance Director BT Group plc. There has been no change in the nature of the group’s risk profile between 31 March 2015 and the date of approval of these financial statements.

Interest rate risk management Management policy Interest rate risk arises primarily from the group’s long-term borrowings. Interest cash flow risk arises from borrowings issued at variable rate, partially offset by cash held at variable rates. Fair value interest rate risk arises from borrowings issued at fixed rates. The group’s policy, as set by the BT Group plc Board, is to ensure that at least 70% of BT Group plc’s consolidated net debt is at fixed rates. Short-term interest rate management is delegated to the treasury operation while long-term interest rate management decisions require further approval by the BT Group plc Group Finance Director, Director of Treasury, Tax and Risk Management or the BT Group Treasurer who have been delegated such authority from the BT Group plc Board.

Hedging strategy In order to manage the group’s interest rate profile, the group has entered into cross-currency and interest rate swap agreements with commercial banks and other institutions to vary the amounts and periods for which interest rates on borrowings are fixed. The duration of the swap agreements matches the duration of the debt instruments. The majority of our long-term borrowings have been, and are, subject to fixed Sterling interest rates after applying the impact of these hedging instruments.

Foreign exchange risk management Management policy The purpose of our foreign currency hedging activities is to protect the group from the risk that eventual future net inflows and net outflows will be adversely affected by changes in exchange rates. The BT Group plc Board’s policy for foreign exchange risk management defines the type of transactions which should normally be covered, including significant operational, funding and currency interest exposures, and the period over which cover should extend for the different types of transactions. Short-term foreign exchange management is delegated to the treasury operation whilst long-term foreign exchange management decisions require further approval from the BT Group plc Group Finance Director, Director of Treasury, Tax and Risk Management or the BT Group Treasurer who have been delegated such authority by the BT Group plc Board.

Hedging strategy A significant proportion of the group’s external revenue and costs arise within the UK and are denominated in Sterling. The group’s non-UK operations generally trade and are funded in their functional currency which limits their exposure to foreign exchange volatility. Foreign currency borrowings used to finance the group’s operations have been predominantly swapped into Sterling using cross-currency swaps. The group also enters into forward currency contracts to hedge foreign currency, capital purchases, purchase and sale commitments, interest expense and foreign currency investments. The commitments hedged are principally denominated in US Dollar, Euro and Asia Pacific region currencies. As a result, the group’s exposure to foreign currency arises mainly on its non-UK subsidiary investments and on residual currency trading flows.

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24. Financial instruments and risk management continued The table below reflects the currency and interest rate profile of our loans and borrowings after the impact of hedging.

2015 2014 Fixed rate Floating rate Fixed rate Floating rate interest interest Total interest interest Total At 31 March £m £m £m £m £m £m Sterling 7,601 1,995 9,596 7,946 1,265 9,211 Euro – 482 482 – 285 285 Total 7,601 2,477 10,078 7,946 1,550 9,496 Ratio of fixed to floating 75% 25% 100% 84% 16% 100% Weighted average effective fixed interest rate – Sterling 6.3% 6.6%

The floating rate loans and borrowings bear interest rates fixed in advance for periods ranging from one day to one year, primarily by reference to LIBOR and EURIBOR quoted rates.

Sensitivity analysis The group is exposed to volatility in the income statement and shareholders’ equity arising from changes in interest rates and foreign exchange rates. To demonstrate this volatility, management have concluded that the following are reasonable benchmarks for performing sensitivity analysis: – for interest, a 1% increase in interest rates and parallel shift in yield curves across Sterling, US Dollar and Euro currencies – for foreign exchange, a 10% strengthening/weakening in Sterling against other currencies The impact on the group’s annual net finance expense of a 1% increase in interest rates would be a decrease of £200m (2013/14: £207m). The impact on equity, before tax, of a 1% increase in interest rates is as detailed below:

2015 2014 £m £m Increase Increase At 31 March (Reduce) (Reduce) Sterling interest rates 428 337 US Dollar interest rates (400) (361) Euro interest rates (34) (14)

A 1% decrease in interest rates would have broadly the same impact in the opposite direction. The group’s exposure to foreign exchange volatility in the income statement, after hedging, and within shareholders’ equity (excluding translation exposures) was insignificant in both 2014/15 and 2013/14.

Credit ratings The group’s 2016 and 2030 bonds contain covenants which have required the group to pay higher rates of interest once the group ceased to be rated at least A3 in the case of Moody’s or at least A– in the case of Standard & Poor’s (S&P). Additional interest of 0.25% per year accrues for each ratings category downgrade by each agency below those levels from the next coupon date following a downgrade. Based on the total notional value of debt outstanding of £2.5bn at 31 March 2015, the group’s finance expense would increase/decrease by approximately £12m a year if BT’s credit rating were to be downgraded/upgraded, respectively, by one credit rating category by both agencies from the current ratings. BT Group plc’s credit ratings were as detailed below:

2015 2014 At 31 March rating Outlook Rating Outlook Rating agency Standard & Poor’s BBB Stable BBB Stable Moody’s Baa2 Positive Baa2 Positive

BT Group plc is targeting a BBB+/Baa1 credit rating over the medium term.

802639 BT Group PLC.indb 102 5/19/2015 1:07:25 AM Notes to the consolidated financial statements 103

24. Financial instruments and risk management continued Liquidity risk management Management policy The group ensures its liquidity is maintained by entering into short, medium and long-term financial instruments to support operational and other funding requirements. The group determines its liquidity requirements by the use of both short and long-term cash forecasts. These forecasts are supplemented by a financial headroom analysis which is used to assess funding adequacy for at least a 12-month period. On at least an annual basis the BT Group plc Board reviews and approves the maximum long-term funding of the group and on an ongoing basis considers any related matters. Refinancing risk is managed by limiting the amount of borrowing that matures within any specified period and having appropriate strategies in place to manage refinancing needs as they arise. The maturity profile of the group’s loans and borrowings at 31 March 2015 is disclosed in note 22. The group has term debt maturities of £1.3bn in 2015/16. Short and medium-term requirements are regularly reviewed and managed by the treasury operation within the parameters of the policies set by the BT Group plc Board. The group holds cash, cash equivalents and current investments in order to manage short-term liquidity requirements. At 31 March 2015 the group had undrawn committed borrowing facilities of £1.5bn (2013/14: £1.5bn) maturing in September 2019 and a further £3.6bn (2013/14: £nil) with an availability period to the earlier of the completion of BT Group plc's planned acquisition of EE, or August 2016. This is subject to certain restrictions and can only be used to fund the transaction, including transaction costs.

Maturity analysis The following table provides an analysis of the remaining contractually agreed cash flows including interest payable for the group’s non-derivative financial liabilities on an undiscounted basis, which therefore differs from both the carrying value and fair value.

Non-derivative financial liabilities Loans Interest on Trade and and other loans and other other borrowings borrowings payables Provisions Total At 31 March 2015 £m £m £m £m £m Due within one year 1,706 515 3,805 32 6,058 Between one and two years 1,431 458 – 19 1,908 Between two and three years 1,251 392 – 15 1,658 Between three and four years 549 315 – 15 879 Between four and five years 1,033 302 – 13 1,348 After five years 4,463 2,973 – 218 7,654

10,433 4,955 3,805 312 19,505 Interest payments not yet accrued – (4,759) – – (4,759) Fair value adjustment for hedged risk 143 – – – 143 Impact of discounting – – – (104) (104) Carrying value on the balance sheeta 10,576 196 3,805 208 14,785

Loans Interest on Trade and and other loans and other other borrowings borrowings payables Provisions Total At 31 March 2014 £m £m £m £m £m Due within one year 1,641 554 3,756 37 5,988 Between one and two years 1,291 485 – 36 1,812 Between two and three years 1,353 424 – 22 1,799 Between three and four years 1,172 360 – 18 1,550 Between four and five years 492 287 – 17 796 After five years 3,572 3,045 – 225 6,842 9,521 5,155 3,756 355 18,787 Interest payments not yet accrued – (4,923) – – (4,923) Fair value adjustment for hedged risk 61 – – – 61 Impact of discounting – – – (157) (157) Carrying value on the balance sheeta 9,582 232 3,756 198 13,768

a Foreign currency-related cash flows were translated at closing rates as at the relevant reporting date. Future variable interest rate cash flows were calculated using the most recent rate applied at the relevant balance sheet date. Trade and other payables are held at amortised cost. The carrying amount of these balances approximates to fair value due to the short maturity of amounts payable.

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24. Financial instruments and risk management continued The following table provides an analysis of the contractually agreed cash flows in respect of the group’s derivative financial instruments. Cash flows are presented on a net or gross basis in accordance with the settlement arrangements of the instruments.

Derivative financial liabilities

a Analysed by earliest payment date Analysed based on holding instrument to maturity Derivatives – Derivatives – Derivatives – Derivatives – Derivatives – Derivatives – net gross settled gross settled net gross settled gross settled settled outflows inflows Total settled outflows inflows Total At 31 March 2015 £m £m £m £m £m £m £m £m Due within one year 215 1,421 (1,292) 344 88 1,320 (1,179) 229 Between one and two years 471 39 (26) 484 109 42 (30) 121 Between two and three years 273 38 (26) 285 92 42 (30) 104 Between three and four years 177 38 (26) 189 94 42 (30) 106 Between four and five years 48 838 (749) 137 111 842 (753) 200 After five years – 390 (394) (4) 690 476 (491) 675 Totalb 1,184 2,764 (2,513) 1,435 1,184 2,764 (2,513) 1,435

a Analysed by earliest payment date Analysed based on holding instrument to maturity Derivatives – Derivatives – Derivatives – Derivatives – Derivatives – Derivatives – net gross settled gross settled net gross settled gross settled settled outflows inflows Total settled outflows inflows Total At 31 March 2014 £m £m £m £m £m £m £m £m Due within one year 263 1,754 (1,706) 311 125 1,754 (1,706) 173 Between one and two years 351 661 (619) 393 84 560 (525) 119 Between two and three years 642 947 (904) 685 84 950 (908) 126 Between three and four years 70 806 (821) 55 84 65 (61) 88 Between four and five years – 334 (327) 7 84 369 (361) 92 After five years – 198 (186) 12 865 1,002 (1,002) 865 Totalb 1,326 4,700 (4,563) 1,463 1,326 4,700 (4,563) 1,463

a Certain derivative financial instruments contain break clauses whereby either the group or bank counterparty can terminate the swap on certain dates and the mark to market position is settled in cash. b Foreign currency-related cash flows were translated at closing rates as at the relevant reporting date. Future variable interest rate cash flows were calculated using the most recent rate applied at the relevant balance sheet date.

Credit risk management Management policy The group’s exposure to credit risk arises from financial assets transacted by the treasury operation (primarily derivatives, investments, cash and cash equivalents) and from its trading-related receivables. For treasury-related balances, the BT Group plc Board’s defined policy restricts exposure to any one counterparty by setting credit limits based on the credit quality as defined by Moody’s and S&P and by defining the types of financial instruments which may be transacted. The minimum credit ratings permitted with counterparties in respect of new transactions are A3/A– for long-term and P1/A1 for short- term investments. Action is taken where appropriate and cost effective, if counterparties in respect of existing transactions fall below the permitted criteria. The treasury operation continuously reviews the limits applied to counterparties and will adjust the limit according to the nature and credit standing of the counterparty and in response to market conditions, up to the maximum allowable limit set by the BT Group plc Board.

Operational management policy The BT Group plc Board’s credit policy for trading-related financial assets is applied and managed by each of the lines of business to ensure compliance. The policy requires that the creditworthiness and financial strength of customers is assessed at inception and on an ongoing basis. Payment terms are set in accordance with industry standards. Where appropriate, the group may endeavour to minimise risks by requesting securities such as deposits, guarantees and letters of credit. The group takes proactive steps including constantly reviewing credit ratings of relationship banks to minimise the impact of adverse market conditions on trading-related financial assets.

Exposures The maximum credit risk exposure of the group’s financial assets at the balance sheet date is as follows: 2015 2014 At 31 March Notes £m £m Derivative financial assets 1,329 653 Investments 20 23,185 21,398 Trade and other receivablesa 15 2,264 2,189 Cash and cash equivalents 21 429 690 27,207 24,930

a The carrying amount excludes £184m (2013/14: £214m) of non-current trade and other receivables which relate to non-financial assets, and £876m (2013/14: £722m) of prepayments and other receivables.

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24. Financial instruments and risk management continued The credit quality and credit concentration of cash equivalents, current asset investments and derivative financial assets are detailed in the tables below. Where the opinion of Moody’s and S&P differ, the lower rating is used.

2015 2014 Moody’s/S&P credit rating of counterparty £m £m Aa2/AA and above 3,133 1,774 Aa3/AA– 206 47 A1/A+ 248 111 A2/Aa 793 434 A3/A– 121 – Baa1/BBB+ 439 376 Baa2/BBB and below 11 – 4,951 2,742

a The group holds cash collateral of £437m (2013/14: £174m) in respect of derivative financial assets with certain counterparties.

The concentration of credit risk for trading balances of the group is provided in note 15, which analyses outstanding balances by line of business. Where multiple transactions are undertaken with a single financial counterparty, or group of related counterparties the group has entered into netting arrangements to reduce the group’s exposure to credit risk by making use of standard International Swaps and Derivatives Association (ISDA) documentation. The group has also entered into credit support agreements with certain swap counterparties whereby on a weekly and monthly basis the fair value position on notional £945m of long dated cross-currency swaps and interest rate swaps is collateralised. The related net cash inflow during the year was £297m (2013/14: cash outflow of £209m). The collateral paid and received is recognised within current asset investments (2013/14: cash and cash equivalents), and loans and other borrowings, respectively.

Offsetting of financial instruments The table below shows the group’s financial assets and liabilities that are subject to offset in the group’s balance sheet and the impact of enforceable master netting or similar agreements.

Related amounts not set off in the balance sheet Amounts Right of presented in set off with Gross Amounts the balance derivative Cash Net Financial assets and liabilities amounts set off sheet counterparties collateral amount At 31 March 2015 £m £m £m £m £m £m Derivative financial assets 1,329 – 1,329 (603) (437) 289 Derivative financial liabilities (1,095) – (1,095) 603 30 (462) Cash and cash equivalents 583 (154) 429 – – 429 Bank overdrafts (181) 154 (27) – – (27) Total 636 – 636 – (407) 229

Related amounts not set off in the balance sheet Amounts Right of presented in set off with Gross Amounts the balance derivative Cash Net Financial assets and liabilities amounts set off sheet counterparties collateral amount At 31 March 2014 £m £m £m £m £m £m Derivative financial assets 653 – 653 (297) (174) 182 Derivative financial liabilities (818) – (818) 297 20 (501) Cash and cash equivalents 3,160 (2,470) 690 – – 690 Bank overdrafts (2,481) 2,470 (11) – – (11) Total 514 – 514 – (154) 360

Cash and cash equivalents and bank overdrafts include amounts set off of £154m (2013/14: £2,470m) as part of a master netting agreement with Barclays Bank Plc. Balances held within this arrangement are pooled and interest is paid or received on the net balance.

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24. Financial instruments and risk management continued Derivatives All of the group’s derivative financial instruments are held at fair value on the group’s balance sheet. The fair values of outstanding swaps and foreign exchange contracts are estimated using discounted cash flow models and market rates of interest and foreign exchange at the balance sheet date.

Current Non current Current Non current Derivatives asset asset liability liability At 31 March 2015 £m £m £m £m Designated in a cash flow hedge 86 941 161 698 Designated in a fair value hedge 6 143 – – Other 5 148 7 229 Total derivatives 97 1,232 168 927

Current Non current Current Non current Derivatives asset asset liability liability At 31 March 2014 £m £m £m £m Designated in a cash flow hedge 73 394 74 514 Designated in a fair value hedge 6 61 – – Other 35 84 65 165 Total derivatives 114 539 139 679

During the year the group deferred a gain of £nil (2013/14: £16m) relating to the fair value of a derivative energy contract at initial recognition. At 31 March 2015 the amount deferred which is not yet recognised in the income statement is £14m (2013/14: £14m). With the exception of this contract which is included at Level 3, and valued using assumptions on volumes, inflation, and market energy prices, all other derivative financial instruments are categorised at Level 2 of the fair value hierarchy as defined in note 20.

Hedging activities Derivatives may qualify as hedges for accounting purposes if they meet the criteria for designation as fair value hedges or cash flow hedges in accordance with IAS 39.

Cash flow hedges Instruments designated in a cash flow hedge include interest rate swaps and cross-currency swaps hedging Euro and US Dollar denominated borrowings. Forward currency contracts are taken out to hedge step up interest on currency denominated borrowings relating to our 2030 US Dollar bond. The hedged cash flows will affect profit or loss as interest and principal amounts are repaid over the remaining term of the borrowings. (See note 22 Loans and other borrowings). Forecast foreign currency purchases, principally denominated in US Dollar, Euro and Asia Pacific currencies, are hedged 12 months forward, with certain specific transactions hedged further forward. The related cash flows will be recognised in the income statement over this period. All cash flow hedges were fully effective in the period. See note 25 for details of the movements in the cash flow hedge reserve.

Fair value hedges Fair value hedges consist of interest rate and cross-currency swaps that are used to protect against changes in the fair value of the 2028 Sterling bond due to movements in market interest rates. Gains and losses arising on fair value hedges are disclosed in note 25.

Other derivatives BT Group plc’s policy is not to use derivatives for speculative purposes. However, due to the complex nature of hedge accounting under IAS 39, some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more appropriate. Derivative instruments that do not qualify for hedge accounting are classified as held for trading and held at fair value through profit or loss under IAS 39.

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25. Other reserves Other comprehensive income Cash flow Available-for- Translation Merger and Total other reservea sale reserveb reservec other reservesd reserves £m £m £m £m £m At 1 April 2012 229 24 366 858 1,477 Exchange differences – – 47 – 47 Net fair value gain on cash flow hedges 105 – – – 105 Recognised in income and expense (168) – – – (168) Fair value movement on available-for-sale assets – 14 – – 14 Tax recognised in other comprehensive income 14 – 10 – 24 At 1 April 2013 180 38 423 858 1,499 Exchange differences – – (176) – (176) Net fair value loss on cash flow hedges (528) – – – (528) Recognised in income and expense 384 – – – 384 Fair value movement on available-for-sale assets – (27) – – (27) Tax recognised in other comprehensive income 6 – (2) – 4 At 1 April 2014 42 11 245 858 1,156 Exchange differences – – 5 – 5 Net fair value gain on cash flow hedges 207 – – – 207 Recognised in income and expense (218) – – – (218) Fair value movements on available-for-sale assets – 7 – – 7 Tax recognised in other comprehensive income 24 – 13 – 37 At 31 March 2015 55 18 263 858 1,194 a The cash flow reserve is used to record the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Amounts ‘recognised in income and expense’ include a net charge to the cash flow reserve of £244m (2013/14: net credit of £374m, 2012/13: net charge of £180m) relating to fair value movements on derivatives. The items generating these foreign exchange movements are in designated cash flow hedge relationships. b The available-for-sale reserve is used to record the cumulative fair value gains and losses on available-for-sale financial assets. The cumulative gains and losses are recycled to the income statement on disposal of the assets. c The translation reserve is used to record cumulative translation differences on the assets and liabilities of foreign operations. The cumulative translation differences are recycled to the income statement on disposal of the foreign operation. d The merger reserve arose on the group reorganisation that occurred in November 2001 and represented the difference between the nominal value of shares in the new ultimate parent company, BT Group plc, and the aggregate of the share capital, share premium account and capital redemption reserve of the prior ultimate parent company, British Telecommunications plc.­­

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26. Directors’ emoluments and pensions For the year ended 31 March 2015 the aggregate emoluments of the directors excluding deferred bonuses of £355,000 (2013/14: £693,000) was £2,177,000 (2013/14: £2,263,000). Deferred bonuses are payable in 5p ordinary shares of BT Group plc in three years’ time subject to continuous employment. Retirement benefits were accruing to one director (2013/14: one) under a money purchase scheme. During the year one director exercised options (2013/14: one) under BT Group plc share option plans. Three directors who held office for the whole or part of the year (2013/14: three) received or are entitled to receive 5p ordinary shares of BT Group plc under BT long-term incentive plans. The aggregate value of BT Group plc shares which vested to directors during the year under BT long-term incentive plans was £3,512,000 (2013/14: £4,412,000). The emoluments of the highest paid director excluding his deferred bonus of £238,000 (2013/14: £515,000) were £1,321,000 (2013/14: £1,464,000). He is entitled to receive 1,932,972 BT Group plc 5p ordinary shares under BT long-term incentive plans subject to continuous employment and in some cases to certain performance conditions being met. Included in the above aggregate emoluments are those of Tony Chanmugam who is also a director of the ultimate holding company, BT Group plc. The directors do not believe it is practicable for the purposes of this report to apportion the amounts of total emoluments received by him between his services as director of the company and his services as director of BT Group plc. The emoluments of the directors are calculated in accordance with the relevant statutory provisions applicable to the company.

27. related party transactions Key management personnel comprise executive and non-executive directors and members of the Operating Committee of BT Group plc as well as the directors of the company. Compensation of key management personnel is disclosed in note 5. Amounts paid to the group’s retirement benefit plans are set out in note 18. British Telecommunications plc and certain of its subsidiaries act as a funder and deposit taker for cash related transactions for both its parent and ultimate parent company. The loan arrangements described below with these companies reflect this. Cash transactions usually arise where the parent and ultimate parent company are required to meet their external payment obligations or receive amounts from third parties. These principally relate to the payment of dividends, the buyback of shares, the exercise of share options and the issuance of ordinary shares. Transactions between the ultimate parent company, parent company and the group are settled on both a cash and non-cash basis through these loan accounts depending on the nature of the transaction. In 2001/02 the group demerged its former mobile phone business and as a result BT Group plc became the listed ultimate parent company of the remaining group. The demerger steps resulted in the formation of an intermediary holding company, BT Group Investments Limited, between BT Group plc and British Telecommunications plc. This intermediary company held an investment of £18.5bn in British Telecommunications plc which was funded by an intercompany loan facility with British Telecommunications plc. A dividend of £1,200m (2013/14: £1,300m) was settled on 15 May 2014 with the parent company in relation to the year ended 31 March 2014. See note 10 and the group statement of changes in equity. A dividend of £1,450m has been declared in relation to the year ended 31 March 2015. This was declared after 31 March 2015 so no liability (amount owed to parent company) is recorded in these financial statements. The loan facilities with both the parent company and ultimate parent company accrue interest at a rate of LIBOR plus 102.5 basis points, and are subject to an overall maximum of £25bn and £10bn respectively. The parent company currently finances its obligations on the loan as they fall due through dividends paid by the company. On 12 February 2015 the ultimate parent company raised £1.0bn from an equity placing and entered into an additional intercompany loan agreement with British Telecommunications plc for this amount. This amount was raised to support BT Group plc's planned acquisition of EE. Transaction costs of £26m relating to the planned acquisition were incurred by British Telecommunications plc in 2014/15. A summary of the balances with the parent and ultimate parent companies and the finance income or expense arising in respect of these balances is set out below:

2015 2014 Asset (liability) Finance income Asset (liability) Finance income at 31 March (expense) at 31 March (expense) Notes £m £m £m £m Amounts owed by (to) parent company Loan facility – non-current assets investments 20, 23 18,263 195 17,587 180 Loan facility – current asset investments 20 45 n/a 763 n/a Trade and other receivables 15 – n/a – n/a Trade and other payables 16 (41) n/a (40) n/a Amounts owed by (to) ultimate parent company Non-current assets investments 20, 23 1,307 23 1,225 28 Non-current liabilities loans 22 (1,002) (2) – – Trade and other receivables 15 1 n/a 4 n/a Current asset investments 20 3 n/a 15 n/a Current liabilities loans 22 (2) – – – Trade and other payables 16 (5) n/a (8) n/a

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28. Financial commitments and contingent liabilities Financial commitments were as follows: 2015 2014 At 31 March £m £m Capital commitments 507 400 Programme rights commitments 2,512 1,657 Total 3,019 2,057

At 31 March 2015 programme rights commitments, mainly relating to football broadcast rights, are those for which the licence period has not yet started. Future minimum operating lease payments for the group were as follows:

2015 2014 £m £m Payable in the year ending 31 March: 2015 – 396 2016 427 397 2017 401 368 2018 392 365 2019 377 363 2020 365 366 Thereafter 4,562 4,583 Total future minimum operating lease payments 6,524 6,838

Operating lease commitments were mainly in respect of land and buildings which arose from a sale and operating leaseback transaction in a prior period. Leases have an average term of 17 years (2013/14: 18 years) and rentals are fixed for an average of17 years (2013/14: 18 years). Other than as disclosed below, there were no contingent liabilities or guarantees at 31 March 2015 other than those arising in the ordinary course of the group’s business and on these no material losses are anticipated. The group has insurance cover to certain limits for major risks on property and major claims in connection with legal liabilities arising in the course of its operations. Otherwise, the group generally carries its own risks. Under the Broadband Delivery UK programme, grants received by the group may be subject to re-investment or repayment to the customer depending on the level of take-up. The group has provided guarantees relating to certain leases entered into by Telefónica UK Limited (formerly O2 UK Limited) prior to the demerger of mmO2 from BT on 19 November 2001. mmO2 plc (part of the Telefónica Group) has given BT a counter indemnity for these guarantees. There is no exposure in the event of credit default in respect of amounts used to defease future lease obligations. The guarantee lasts until Telefónica UK Limited has discharged all its obligations, which is expected to be when the leases end on 30 January 2017. The group does not believe that there is any single current court action that would have a material adverse effect on the financial position or operations of the group. During 2014/15 the aggregate volume and value of legal actions which the group is party to reduced.

29. Subsequent events The shareholders of BT Group plc, the group’s ultimate parent company, approved the proposed acquisition of EE on 30 April 2015 and we are now awaiting approval from the Competition and Markets Authority. Subject to merger clearance, we expect the transaction to complete before the end of the 2015/16 financial year.

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Report on the parent company financial statements Our responsibility is to audit and express an opinion on the Our opinion financial statements in accordance with applicable law and In our opinion, British Telecommunications plc’s parent company International Standards on Auditing (UK and Ireland) (‘ISAs (UK & financial statements (the ‘financial statements’): Ireland)’). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. • give a true and fair view of the state of the parent company’s affairs as at 31 March 2015; This report, including the opinions, has been prepared for and • have been properly prepared in accordance with United only for the company’s members as a body in accordance with Kingdom Generally Accepted Accounting Practice; and Chapter 3 of Part 16 of the Companies Act 2006 and for no other • have been prepared in accordance with the requirements of purpose. We do not, in giving these opinions, accept or assume the Companies Act 2006. responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save What we have audited where expressly agreed by our prior consent in writing. British Telecommunications plc’s financial statements comprise: What an audit of financial statements involves • the parent company balance sheet as at 31 March 2015; We conducted our audit in accordance with ISAs (UK & Ireland). • the parent company accounting policies for the year then An audit involves obtaining evidence about the amounts and ended; and disclosures in the financial statements sufficient to give reasonable • the notes to the financial statements which include other assurance that the financial statements are free from material explanatory information. misstatement, whether caused by fraud or error. This includes an The financial reporting framework that has been applied in the assessment of: preparation of the financial statements is applicable law and • whether the accounting policies are appropriate to the parent United Kingdom Accounting Standards (United Kingdom Generally company’s circumstances and have been consistently applied Accepted Accounting Practice). and adequately disclosed; In applying the financial reporting framework, the directors have • the reasonableness of significant accounting estimates made made a number of subjective judgements, for example in respect by the directors; and of significant accounting estimates. In making such estimates, • the overall presentation of the financial statements. they have made assumptions and considered future events. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our Opinion on other matter prescribed by the Companies Act 2006 own judgements, and evaluating the disclosures in the financial In our opinion, the information given in the Strategic Report and statements. the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the financial We test and examine information, using sampling and other statements. auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain Other matters on which we are required to report by exception audit evidence through testing the effectiveness of controls, Adequacy of accounting records and information and substantive procedures or a combination of both. explanations received In addition, we read all the financial and non-financial information Under the Companies Act 2006 we are required to report to you in the Annual Report & Form 20-F 2015 to identify material if, in our opinion: inconsistencies with the audited financial statements and to • we have not received all the information and explanations we identify any information that is apparently materially incorrect require for our audit; or based on, or materially inconsistent with, the knowledge acquired • adequate accounting records have not been kept by the parent by us in the course of performing the audit. If we become aware company, or returns adequate for our audit have not been of any apparent material misstatements or inconsistencies we received from branches not visited by us; or consider the implications for our report. • the financial statements are not in agreement with the accounting records and returns. Other matter We have reported separately on the group financial statements We have no exceptions to report arising from this responsibility. of British Telecommunications plc for the year ended 31 March Directors’ remuneration 2015. Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Paul Barkus (Senior Statutory Auditor) Responsibilities for the financial statements and the audit for and on behalf of PricewaterhouseCoopers LLP Our responsibilities and those of the directors Chartered Accountants and Statutory Auditors As explained more fully in the Statement of directors’ London responsibilities set out on page 58, the directors are responsible 13 May 2015 for the preparation of the financial statements and for being satisfied that they give a true and fair view.

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FINANCIAL STATEMENTS OF BRITISH TELECOMMUNICATIONS PLC British Telecommunications plc parent company accounting policies

(i) Accounting basis Services As used in these financial statements and associated notes, Turnover arising from separable installation and connection the term ‘company’ refers to British Telecommunications plc services is recognised when it is earned, upon activation. Turnover (BT plc). These separate financial statements of the company are from the rental of analogue and digital lines and private circuits presented as required by the Companies Act 2006. The separate is recognised evenly over the period to which it relates. Turnover financial statements have been prepared in accordance with UK from calls is recognised at the time the call is made over the Generally Accepted Accounting Practice (UK GAAP). company’s network. The principal accounting policies are set out below and have been Subscription fees, consisting primarily of monthly charges for applied consistently throughout the year and the previous year. access to broadband and other internet access or voice services, are recognised as turnover as the service is provided. Turnover The financial statements are prepared on a going concern basis from the interconnection of voice and data traffic between other and under the historical cost convention as modified by the telecommunications operators is recognised at the time of transit revaluation of certain financial instruments at fair value. across the company’s network.

Exemptions Equipment sales As permitted by Section 408(3) of the Companies Act 2006, the Turnover from the sale of equipment is recognised when all the company’s profit and loss account has not been presented. significant risks and rewards of ownership are transferred to the buyer, which is normally the date the equipment is delivered The BT plc consolidated financial statements for the year ended and accepted by the customer. 31 March 2015 contain a consolidated cash flow statement. Consequently, the company has taken advantage of the Long-term contractual arrangements exemption in FRS 1, ‘Cash Flow Statements’, not to present its Turnover from long-term contractual arrangements, including own cash flow statement. fixed price contracts to design and build software solutions, is The BT plc consolidated financial statements for the year ended recognised based on the percentage of completion method. The 31 March 2015 contain related party disclosures. Consequently, stage of completion is estimated using an appropriate measure the company has taken advantage of the exemption in FRS 8, according to the nature of the contract such as the proportion ‘Related Party Disclosures’, not to disclose transactions with other of costs incurred relative to the estimated total contract costs, members of the BT Group. or other measures of completion such as the achievement of contract milestones and customer acceptance. In the case of time The BT plc consolidated financial statements for the year ended and materials contracts, turnover is recognised as the service is 31 March 2015 contain financial instruments disclosureswhich rendered. are prepared in accordance with IFRS 7 and which therefore comply with FRS 29, ‘Financial Instruments: Disclosures’. Costs related to delivering services under long-term contractual Consequently, the company is exempted from the disclosure arrangements are expensed as incurred except for an element of requirements of FRS 29 in respect of its financial instruments. costs incurred in the initial set up, transition or transformation phase, which is deferred and recorded within debtors due Accounting standards, interpretations and amendments after more than one year. These costs are then recognised in not yet effective the profit and loss account on a straight line basis over the Following the publication of FRS 100 ‘Application of Financial remaining contract term, unless the pattern of service delivery Reporting Requirements’ by the Financial Reporting Council, BT indicates a different profile is appropriate. These costs are plc is required to change its accounting framework for its entity directly attributable to specific contracts, relate to future activity, financial statements, which is currently UK GAAP, for its financial will generate future economic benefits and are assessed for year commencing 1 April 2015. The purpose of FRS 100 is to recoverability on a regular basis. align reporting in the UK with IFRS. The company will adopt The percentage of completion method relies on estimates of FRS 101 ‘Reduced Disclosure Framework’. total expected contract turnover and costs, as well as reliable measurement of the progress made towards completion. Unless Changes in presentation of the financial statements the financial outcome of a contract can be estimated with In 2013/14 and 2012/13 tangible fixed assets were presented reasonable certainty, no attributable profit is recognised. In net of £126m and £15m of government grants respectively. such circumstances, turnover is recognised equal to the costs These amounts are now disclosed within other creditors which incurred to date, to the extent that such turnover is expected to is consistent with the current year treatment and as required by be recoverable, or costs are accrued to bring the margin to nil. the Companies Act 2006. There was no impact to the results or Recognised turnover and profits are subject to revisions during financial position of the company resulting from this change in the contract if the assumptions regarding the overall contract presentation. outcome are changed. The cumulative impact of a revision in estimates is recorded in the period in which such revisions become (ii) Turnover likely and can be estimated. Where the actual and estimated costs Turnover represents the fair value of the consideration received to completion exceed the estimated turnover for a contract, the or receivable for communication services and equipment sales, full contract life loss is recognised immediately. net of discounts and sales taxes. Turnover is recognised when it is probable that the economic benefits associated with a transaction Multiple element arrangements will flow to the company and the amount of turnover and Where a contractual arrangement consists of two or more associated costs can be measured reliably. Where the company separate elements that have value to a customer on a standalone acts as an agent in a transaction, it recognises turnover net of basis, turnover is recognised for each element as if it were an directly attributable costs. individual contract. The total contract consideration is allocated between the separate elements on the basis of relative fair value and the appropriate turnover recognition criteria are applied to each element as described above.

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(iii) research and development the sale proceeds and the net book value at the date of disposal is Research expenditure is recognised in the profit and loss account recorded in operating costs in the profit and loss account. in the period in which it is incurred. Development expenditure, Included within the cost of network infrastructure and equipment including the cost of internally developed software, is recognised are direct and indirect labour costs, materials, and directly in the profit and loss account in the period in which it is incurred attributable overheads. Depreciation is provided on tangible fixed unless it is probable that economic benefits will flow to the assets on a straight line basis from the time the asset is available company from the asset being developed, the cost of the for use, to write off the asset’s cost over the estimated useful life asset can be reliably measured and technical feasibility can be taking into account any expected residual value. Freehold land is demonstrated, in which case it is capitalised as an intangible asset not depreciated. on the balance sheet. Capitalisation ceases when the asset being developed is ready for use. The lives assigned to principal categories of assets are as follows:

Research and development costs include direct and indirect Land and buildings labour, materials and directly attributable overheads. Freehold buildings 40 years Leasehold land and buildings Unexpired portion of (iv) Leases lease or 40 years, The determination of whether an arrangement is, or contains, a whichever is the lease is based on the substance of the arrangement and requires shorter an assessment of whether the fulfilment of the arrangement is Network infrastructure dependent on the use of a specific asset or assets and whether the Transmission equipment: arrangement conveys the right to use the asset. Duct 40 years Leases of tangible fixed assets where the company holds Cable 3 to 25 years substantially all the risks and rewards of ownership are classified Fibre 5 to 20 years as finance leases. Finance lease assets are capitalised at the Exchange equipment 2 to 13 years commencement of the lease term at the lower of the present Other network equipment 2 to 20 years value of the minimum lease payments or the fair value of the Other leased asset. The obligations relating to finance leases, net of Motor vehicles 2 to 9 years finance charges in respect of future periods, are recognised as Computers and office equipment 3 to 6 years liabilities. Leases are subsequently measured at amortised cost Software 2 to 10 years using the effective interest method. Leases where a significant portion of the risks and rewards are Assets held under finance leases are depreciated over the shorter held by the lessor are classified as operating leases. Rentals are of the lease term or their useful economic life. Residual values and charged to the profit and loss account on a straight line basis over useful lives are reassessed annually and, if necessary, changes are the period of the lease. recognised prospectively.

(v) Foreign currencies (viii) Impairment of fixed assets, intangible assets and goodwill Foreign currency transactions are translated into the reporting Fixed assets, intangible assets and goodwill are tested for currency using the exchange rates prevailing at the date of the impairment if events or changes in circumstances (assessed at transaction. Foreign exchange gains and losses resulting from each reporting date) indicate that the carrying amount might not the settlement of transactions and the translation of monetary be recoverable. Goodwill is also reviewed for impairment at the assets and liabilities denominated in foreign currencies at period end of the first financial year after its initial recognition. end exchange rates are recognised in the profit and loss account in When an impairment test is performed, the recoverable amount is the line that most appropriately reflects the nature of the item or assessed by reference to the higher of the net present value of the transaction. expected future cash flows (value in use) of the continued use of the asset, and the fair value less cost to sell. Impairment losses are (vi) Goodwill and intangible assets recognised in the profit and loss account. Goodwill arising from the purchase of businesses represents the excess of the fair value of the purchase consideration over the fair (ix) Government grants value of the identifiable net assets acquired. Government grants are recognised when there is reasonable Goodwill is amortised on a straight line basis from the time of assurance that the conditions associated with the grants have acquisition over its useful economic life. The economic life is been complied with and the grants will be received. normally presumed to be a maximum of 20 years. Government grants received relating to the purchase or build If a business is subsequently sold, the appropriate unamortised of property, plant and equipment are recognised as deferred goodwill is included in the profit and loss account in the period of income within other creditors and are credited to the profit and disposal as part of the gain or loss on disposal. loss account over the expected useful life of the related asset on a basis that is consistent with our depreciation policy. Telecommunications licence fees paid to governments, which permit telecommunications activities to be operated for defined Grants for the reimbursement of operating expenditure are periods, are initially recorded at cost and amortised from the time deducted from the related category of costs in the profit and loss the network is available for use to the end of the licence period. account.

(vii) Tangible fixed assets (x) Investments in subsidiary undertakings Tangible fixed assets are stated at historical cost, net of any Investments in subsidiary undertakings are stated at cost and accumulated depreciation, and any impairment charges. reviewed for impairment if there are indicators that the carrying On disposal of tangible fixed assets, the difference between value may not be recoverable.

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(xi) Stocks Equity settled share-based payments are measured at fair value Stocks mainly comprise items of equipment held for sale or rental at the date of grant excluding the effect of non market-based and consumable items. vesting conditions but including any market-based performance criteria and the impact of non-vesting conditions (for example Equipment and consumable items are stated at the lower of the requirement for employees to save). The fair value determined cost and estimated net realisable value, after provisions for at the grant date is recognised as an expense on a straight line obsolescence. Cost is calculated on a first-in-first-out basis. basis over the vesting period, based on the company’s estimate of the options or shares that will eventually vest and adjusted (xii) Programme rights for the effect of non market-based vesting conditions. Fair value Programme rights are recognised on the balance sheet from is measured using either the Binomial options pricing model or the point at which the legally enforceable licence period begins. Monte Carlo simulations, whichever is most appropriate to the Rights for which the licence period has not started are disclosed as share-based payment arrangement. contractual commitments in note 14. Payments made to receive commissioned or acquired programming in advance of the legal Service and performance conditions are vesting conditions. right to broadcast the programmes are classified as prepayments. Any other conditions are non-vesting conditions which have to be taken into account to determine the fair value of equity Programme rights are initially recognised at cost and are instruments granted. In the case that an award or option does not amortised from the point at which they are available for use, on a vest as a result of a failure to meet a non-vesting condition that straight line basis over the programming period, or the remaining is within the control of either counterparty, this is accounted for licence term, as appropriate. The amortisation charge is recorded as a cancellation. Cancellations are treated as accelerated vesting within operating costs in the profit and loss account. and all remaining future charges are immediately recognised in Programmes produced internally are recognised within current the profit and loss account. As the requirement to save under assets at production cost, which includes labour costs and an an employee sharesave arrangement is a non-vesting condition, appropriate portion of relevant overheads, and charged to the employee cancellations are treated as an accelerated vesting. profit and loss account over the period of the related broadcast. Awards that lapse or are forfeited result in a credit to the profit Programme rights are tested for impairment in accordance with and loss account (reversing the previously recognised charges) in the company’s policy for impairment of fixed assets, intangible the year in which they lapse or are forfeited. assets and goodwill set out on page 112. (xvi) Current and deferred income tax (xiii) Redundancy costs Current income tax is calculated on the basis of the tax laws Redundancy or leaver costs are payable when employment enacted or substantively enacted at the balance sheet date. The is terminated before the normal retirement date, or when an company periodically evaluates positions taken in tax returns with employee accepts voluntary redundancy in exchange for these respect to situations in which applicable tax regulation is subject benefits. The company recognises redundancy or leaver costs to interpretation, and the company establishes provisions where when it is demonstrably committed to the affected employees appropriate on the basis of the amounts expected to be paid to leaving the company. the tax authorities. (xiv) Post retirement benefits Deferred tax is recognised, in respect of timing differences The company’s obligation in respect of defined benefit pension between the carrying amount of the company’s assets and plans is the present value of the defined benefit pension liabilities and their tax base. A deferred tax asset is recognised obligation less the fair value of the plan assets. The calculation only when, on the basis of all available evidence, it can be of the obligation is performed by a qualified actuary using the regarded as probable that there will be suitable taxable profits, projected unit credit method and key actuarial assumptions at the within the same jurisdiction, in the foreseeable future against balance sheet date. which the deductible timing difference can be utilised. The profit and loss account charge is allocated between an Deferred tax is determined using tax rates that are expected operating charge and net finance income or expense. The to apply in periods in which the asset is realised or liability operating charge reflects the increase in the defined benefit settled, based on tax rates and laws that have been enacted or obligation resulting from pension benefit earned by active substantively enacted by the balance sheet date. Deferred tax employees in the current period. The net finance income reflects balances are not discounted. the expected return on the assets of the plan offset by the unwinding of the discount applied to the liabilities of the plan, (xvii) Dividends based on conditions prevailing at the start of the year. Actuarial Dividend distributions are recognised as a liability in the year in gains and losses are recognised in full in the period in which they which the dividends are approved by the company’s shareholders. occur and are presented in the reconciliation of movement in Interim dividends are recognised when they are paid; final equity shareholders’ funds. dividends when authorised in general meetings by shareholders. The company also operates defined contribution pension (xviii) Provisions schemes and the profit and loss account charge represents the Provisions are recognised when the company has a present contributions payable for the year. legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the (xv) Share-based payments obligation and the amount can be reliably estimated. Provisions The ultimate parent of BT plc, BT Group plc, operates a number of are determined by discounting the expected future cash flows equity settled share-based arrangements, as detailed in note 19 at a pre-tax rate that reflects current market assessments of the to the BT plc consolidated financial statements, under which the time value of money and the risks specific to the liability. Financial company receives services from employees as consideration for liabilities within provisions are initially recognised at fair value and equity instruments (share options and shares) of BT Group plc. subsequently carried at amortised cost using the effective interest method. Onerous lease provisions have been measured at the lower of the cost to fulfil or the cost to exit the contract.

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(xix) Financial instruments Loans and other borrowings Financial assets Loans and other borrowings are initially recognised at fair value plus Financial assets at fair value through profit and loss directly attributable transaction costs. Loans and other borrowings A financial asset is classified in this category if it is either acquired are subsequently measured at amortised cost using the effective principally for the purpose of selling in the short-term (held for interest method and, if included in a fair value hedge relationship, trading) or if so designated by management. Financial assets are re-valued to reflect the fair value movements on the hedged at fair value through profit and loss are initially recognised and risk associated with the loans and other borrowings. The resulting subsequently measured at fair value, with changes in value amortisation of fair value movements, on de-designation of the recognised in the profit and loss account. Any direct transaction hedge, are recognised in the profit and loss account. costs are recognised immediately in the profit and loss account. Derivative financial instruments and hedge accounting Loans and receivables The company uses derivative financial instruments mainly to Loans and receivables are non-derivative financial assets with reduce exposure to foreign exchange and interest rate risks. The fixed or determinable payments that are not quoted in an active company does not hold or issue derivative financial instruments market other than those for which the company may not recover for financial trading purposes. However, derivatives that do not substantially all of its initial investment, other than because of qualify for hedge accounting are classified as held for trading and credit deterioration, which are classified as available-for-sale. are initially recognised and subsequently measured at fair value. Loans and receivables are initially recognised at fair value plus The gain or loss on re-measurement to fair value is recognised transaction costs and subsequently carried at amortised cost using immediately in the profit and loss account in net finance expense. the effective interest method, with changes in carrying value Derivative financial instruments are classified as current assets recognised in the profit and loss account. or current liabilities where they have a maturity period within 12 months. Where derivative financial instruments have a maturity Fixed asset investments period greater than 12 months, they are classified within either Fixed asset investments are stated at cost net of permanent fixed assets or creditors falling due after more than one year. diminution in value. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends upon the nature of the hedge. Available-for-sale financial assets To qualify for hedge accounting, hedge documentation must be Non-derivative financial assets classified as available-for-sale are prepared at inception and the hedge must be expected to be highly either specifically designated in this category or not classified in effective both prospectively and retrospectively. The hedge is tested any of the other categories. Available-for-sale financial assets are for effectiveness at inception and in subsequent periods in which initially recognised at fair value plus direct transaction costs and the hedge remains in operation. Hedge accounting is discontinued then re-measured at subsequent reporting dates to fair value, when the hedging instrument expires or is sold, terminated or no with unrealised gains and losses (except for changes in exchange longer qualifies for hedge accounting or the company chooses rates for monetary items, interest, dividends and impairment to end the hedge relationship. The group designates certain losses, which are recognised in the profit and loss account) derivatives as either cash flow hedges or fair value hedges. recognised in equity until the financial asset is derecognised, at which time the cumulative gain or loss previously recognised in Cash flow hedges equity is taken to the profit and loss account in the line that most When a financial instrument is designated as a hedge of the appropriately reflects the nature of the item or transaction. variability in cash flows of a recognised asset or liability, or a highly probable transaction, the effective part of any gain or loss on the Debtors derivative financial instrument is recognised directly in equity in Financial assets within debtors are initially recognised at fair the cash flow reserve. For cash flow hedges of recognised assets value, which is usually the original invoiced amount, and are or liabilities, the associated cumulative gain or loss is removed subsequently carried at amortised cost using the effective interest from equity and recognised in the same line in the profit and loss method less provisions made for doubtful debts. Provisions are account in the same period or periods that the hedged transaction made specifically where there is evidence of a risk of non payment, affects the profit and loss account. Any ineffectiveness arising on taking into account ageing, previous losses experienced and a cash flow hedge of a recognised asset or liability is recognised general economic conditions. immediately in the profit and loss. Where ineffectiveness arises on highly probable transactions, it is recognised in the profit and Cash loss account line that most appropriately reflects the nature of the Cash includes cash in hand and bank deposits repayable on demand. item or transaction.

Impairment of financial assets Fair value hedges The company assesses at each balance sheet date whether a When a derivative financial instrument is designated as a hedge financial asset or group of financial assets are impaired. Where there of the variability in fair value of a recognised asset or liability, or is objective evidence that an impairment loss has arisen on assets unrecognised firm commitment, the change in fair value of the carried at amortised cost, the carrying amount is reduced with the derivative that is designated as a fair value hedge is recorded in loss being recognised in the profit and loss account. The impairment the profit and loss account at each reporting date, together with loss is measured as the difference between that asset’s carrying any changes in fair value of the hedged asset or liability that is amount and the present value of estimated future cash flows attributable to the hedged risk. discounted at the financial asset’s original effective interest rate. Hedge of net investment in a foreign operation Financial liabilities Exchange differences arising from the retranslation of currency Creditors instruments designated as hedges of net investments in a foreign Financial liabilities within creditors are initially recognised at operation are taken to shareholders’ equity on consolidation to fair value, which is usually the original invoiced amount, and the extent that the hedges are deemed effective. subsequently carried at amortised cost using the effective interest method. Any ineffectiveness arising on a hedge of a net investment in a foreign operation is recognised in net finance expense.

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PARENT COMPANY BALANCE SHEET­

British Telecommunications plc parent company balance sheet a 2015 2014 At 31 March Notes £m £m Fixed assets Intangible assets 1 458 470 Tangible assets 2 14,326 14,152 Derivative financial instruments 18 1,232 539 Investments in subsidiary undertakings, associates and joint ventures 3 29,539 32,243 Other investments 4 19,573 20,404 Total fixed assets 65,128 67,808 Current assets Programme rights 5 118 107 Stocks 51 37 Debtors 6 3,128 2,711 Derivative financial instruments 18 97 114 Other investments 4 11,090 7,380 Cash 190 111 Total current assets 14,674 10,460 Creditors: amounts falling due within one year Loans and other borrowings 7 34,690 12,004 Derivative financial instruments 18 168 139 Other creditors 8 4,405 4,197 Total creditors: amounts falling due within one year 39,263 16,340 Net current liabilities (24,589) (5,880) Total assets less current liabilities 40,539 61,928 Creditors: amounts falling due after more than one year Loans and other borrowings 7 14,384 37,249 Derivative financial instruments 18 927 679 Other creditors 9 1,444 1,045 Total creditors: amounts falling due after more than one year 16,755 38,973 Provisions for liabilities and charges Deferred taxation 10 1,037 1,075 Other provisions 10 488 443 Total provisions for liabilities and charges 1,525 1,518 Net assets excluding pension obligation 22,259 21,437 Pension obligation 15 5,901 5,487 Net assets including pension obligation 16,358 15,950 Capital and reserves Called up share capital 11 2,172 2,172 Share premium account 11 8,000 8,000 Other reserves 11, 12 783 768 Profit and loss account 11 5,403 5,010 Equity shareholders’ funds 16,358 15,950 a Restated for presentation of government grants (see notes 2 and 9).

The financial statements of the company on pages 111 to 127 were approved by the Board of Directors on 13 May 2015 and were signed on its behalf by

Tony Chanmugam Director

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NOTES TO THE FINANCIAL STATEMENTS ­­­­­1. intangible fixed assets Telecoms Goodwill Licences Other Total £m £m £m £m Cost At 1 April 2014 473 202 – 675 Additions – – 10 10 At 31 March 2015 473 202 10 685

Accumulated amortisation At 1 April 2014 205 – – 205 Charge for the year 22 – – 22 At 31 March 2015 227 – – 227

Net book value At 31 March 2015 246 202 10 458 At 31 March 2014 268 202 – 470

2. Tangible fixed assets Assets Network in course of

Land and buildings infrastructurea Otherb construction Total £m £m £m £m £m Cost At 1 April 2014c 412 41,105 4,789 1,107 47,413 Additions – – 117 2,307 2,424 Transfers 16 1,518 458 (1,992) – Disposals and adjustments (15) (1,137) (188) (12) (1,352) At 31 March 2015 413 41,486 5,176 1,410 48,485 Depreciation At 1 April 2014 217 29,412 3,700 – 33,329 Charge for the year 21 1,666 545 – 2,232 d Disposals and adjustments (12) (1,144) (172) – (1,328) At 31 March 2015 226 29,934 4,073 – 34,233 Net book value At 31 March 2015 187 11,552 1,103 1,410 14,252 Engineering stores – – – 74 74 Total 187 11,552 1,103 1,484 14,326 At 31 March 2014c 195 11,693 1,089 1,107 14,084 Engineering stores – – – 68 68 c Total 195 11,693 1,089 1,175 14,152

2015 2014 At 31 March £m £m The net book value of land and buildings comprised: Freehold 49 56 Leasehold 138 139 Total net book value of land and buildings 187 195 a The net book value of assets held under finance leases included within network infrastructure at 31 March 2015 was £292m (2013/14: £118m). The depreciation charge on those assets for the year ended 31 March 2015 was £50m (2013/14: £150m). Within network infrastructure are assets with net book value of £7.4bn which have useful economic lives of more than 18 years. b Other mainly comprises software, computers and motor vehicles. c The opening cost at 1 April 2014 has been increased by £141m to restate the presentation of government grants, see note (i) on page 111 and notes 8 and 9. d Fully depreciated assets in the company’s fixed asset registers were reviewed during the year, as part of the BT Group plc annual asset verification exercise, and certain assets that were no longer in use have been written out, reducing cost and accumulated depreciation by £1.3bn.

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3. Investments in subsidiary undertakings, associates and joint ventures Associates Subsidiary and joint undertakings ventures Total £m £m £m Cost At 1 April 2014 38,783 8 38,791 Additionsa 1,383 8 1,391 a Disposals (56) – (56) At 31 March 2015 40,110 16 40,126 Provisions and amounts written off At 1 April 2014 6,548 – 6,548 Additionsa 4,076 – 4,076 a Disposals (37) – (37) At 31 March 2015 10,587 – 10,587 Net book value at 31 March 2015 29,523 16 29,539 Net book value at 31 March 2014 32,235 8 32,243 a Additions and disposals principally arise due to transactions undertaken to simplify our entity hierarchy.

Details of the principal operating subsidiary undertakings are set out on page 127. 4. Other investments 2015 2014 At 31 March £m £m Fixed assets Available-for-sale assets 3 3 Loans to group undertakings – 7,186 Loans to parent undertakings 19,570 13,215 19,573 20,404 Current assets Available-for-sale assets 3,133 1,774 Loans and receivables 445 309 Loans to group undertakings 7,464 4,711 Loans to parent undertakings 48 586 11,090 7,380

Available-for-sale current assets consist of investments in AAA rated liquidity funds denominated in Sterling. Loans and receivables consist of bank deposits totalling £445m (2013/14: £309m), £386m (2013/14: £254m) are denominated in Sterling and £59m (2013/14: £55m) are denominated in US Dollars. Loans to group and parent undertakings total £27,082m (2013/14: £25,698m). These consist of amounts denominated in Sterling of £24,635m (2013/14: £21,126m), Euros of £1,295m (2013/14: £1,284m), US Dollars of £372m (2013/14: £2,418m) and other currencies of £780m (2013/14: £870m). Intercompany loans and borrowings were restructured during 2014/15, such that loans of £7,186m due to other group entities became due to the immediate parent company.

5. programme rights Total £m At 1 April 2013 – Additions 310 Amortisation (203) At 1 April 2014 107 Additions 341 Amortisation (330) At 31 March 2015 118

Additions reflect TV programme rights for which the legally enforceable licence period has started during the year. Payments made for programme rights for which the legally enforceable licence period has not yet started are included within prepayments (see note 6). Programme rights commitments are disclosed in note 14.

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6. Debtors 2015 2014 At 31 March £m £m Debtors due within one year Trade debtors 669 632 Amount owed by group undertakings 1,193 1,015 Amount owed by parent undertakings 1 4 Other debtors 297 128 Accrued income 536 476 Prepayments 340 329 3,036 2,584 Debtors due after more than one year a Other assets 92 127 Total debtors 3,128 2,711 a Primarily represents prepayments and costs relating to the initial set up, transition or transformation phase of long-term networked IT services contracts.

7. loans and other borrowings 2015 2014 At 31 March £m £m 5.25% €750m bond due June 2014a – 645 6.125% €600m bond due July 2014a,b – 518 2.00% US$750m bond due June 2015a 508 452 6.50% €1,000m bond due July 2015a 758 867 1.625% US$600m bond due June 2016a 406 361 8.50% £683m bond due December 2016 (minimum 7.50%d) 695 699 1.25% US$500m bond due February 2017a 337 300 6.625% £500m bond due June 2017a 525 526 5.95% US$1,100m bond due January 2018a 750 668 2.35% US$800m bond due February 2019a 541 481 1.125% €1,000m bond due June 2019 730 – 8.625% £300m bond due March 2020 299 299 3.50% £250m index linked bond due April 2025 392 382 5.75% £600m bond due December 2028c 751 670 9.625% US$2,670m bond due December 2030a (minimum 8.625%d) 1,850 1,648 a 6.375% £500m bond due June 2037 522 522 Total listed bonds 9,064 9,038 Finance leases 4 6 f Finance leases with group undertakings 294 50 Total finance leases 298 56 Commercial papere – 324 Loans from group undertakingsf 39,270 39,655 Other loans 439 177 Bank overdrafts 3 3 Total other loans and borrowings 39,712 40,159 49,253 Total loans and borrowings 49,074 a Designated in a cash flow hedge relationship. b The interest rate payable on this bond attracts an additional 1.25% for a downgrade by one credit rating category by either or both Moody’s and S&P below Baa3/BBB–, respectively. c Designated in a fair value hedge relationship. d The interest rate payable on this bond attracts an additional 0.25% for a downgrade by one credit rating by either Moody’s or S&P to the group’s senior unsecured debt below A3/A- respectively. In addition, if Moody’s or S&P subsequently increase the ratings then the interest rate will be decreased by 0.25% for each rating category upgrade by each rating agency. In no event will the interest rate be reduced below the minimum rate reflected in the above table. e Commercial paper of £nil (2013/14: £237m) is denominated in Euros and of £nil (2013/14: £87m) in US Dollars. f Loans from group undertakings including finance leases are £39,564m (2013/14: £39,705m) which consist of £37,191m (2013/14: £34,779m) denominated in Sterling, £1,371m (2013/14: £1,971m) denominated in Euros, £423m (2013/14: £2,464m) denominated in US Dollars and £579m (2013/14: £491m) denominated in other currencies. Included within these balances are fixed interest bonds issued to group undertakings amounting to £1,783m (2013/14: £1,714m) denominated in Sterling and £13m (2013/14: £15m) denominated in Euros with maturities between 2015 and 2025.

The interest rates payable on loans and borrowings disclosed above reflect the coupons on the underlying issued loans and borrowings and not the interest rates achieved through applying associated cross-currency and interest rate swaps in hedge arrangements.

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7. loans and other borrowings continued Loans and other borrowings are analysed as follows: 2015 2014 At 31 March £m £m Current liabilities Listed bonds 1,422 1,349 Finance leases 2 2 Finance lease with subsidiary undertakings 62 33 Commercial paper – 324 Loans from group undertakings 32,763 10,118 Other loans and bank overdrafts 441 178

Total current liabilities 34,690 12,004 Non-current liabilities Listed bonds 7,642 7,689 Finance leases 2 4 Finance lease with subsidiary undertakings 232 17 Loans from group undertakings 6,507 29,537 Other loans and borrowings 1 2 Total non-current liabilities 14,384 37,249 Total 49,074 49,253 2015 2014 At 31 March £m £m Repayments falling due as follows: Within one year, or on demand 34,690 12,004 Between one and two years 1,477 1,283 Between two and three years 1,297 1,344 Between three and four years 594 1,163 Between four and five years 1,077 483 After five years 9,796 32,915

Total due for repayment after more than one year 14,241 37,188 Total repayments 48,931 49,192 Fair value adjustments for hedged risk 143 61 Total loans and other borrowings 49,074 49,253

During 2014/15, following a review of intra-group borrowings, the terms of certain agreements were amended resulting in a reclassification of £21,420m from non-current liabilities to current liabilities.

Repayment of outstanding Minimum lease payments lease obligations 2015 2014 2015 2014 At 31 March £m £m £m £m Amounts payable under finance leases: Within one year 77 36 64 35 In the second to fifth years inclusive 276 20 225 17 After five years 22 5 9 4 375 61 298 56 Less: future finance charges (77) (5) – – Total finance lease obligations 298 56 298 56 The company’s obligations under finance leases are secured by the lessors’ title to the leased assets. 8. Other creditors: amounts falling due within one year 2015 2014 At 31 March £m £m Trade creditors 1,735 1,629 Amounts owed to group undertakings 620 437 Amounts owed to parent undertakings 47 48 Other taxation and social security 325 388 Current tax payable 80 143 Other creditors 397 414 Accrued expenses 301 283 a Deferred income 900 855 Total 4,405 4,197 a Deferred income includes government grants received or accrued of £29m (2013/14: £nil).

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9. Other creditors: amounts falling due after more than one year 2015 2014 At 31 March £m £m Other creditorsa 921 885 Deferred incomeb 523 160

Total 1,444 1,045 a Other creditors mainly relate to operating lease liabilities. b Deferred income includes government grants received or accrued of £494m at 31 March 2015. Deferred income at 31 March 2014 has been increased by £141m to restate the presentation of government grants, see note (i) on page 111.

10. provisions for liabilities and charges Other

Property provisionsa provisionsb Total Provisions for liabilities and charges excluding deferred taxation £m £m £m At 1 April 2014 201 242 443 Charged to the profit and loss account 46 86 132 Unwind of discount 8 – 8 Utilised or released (38) (63) (101) Transfers – 6 6 At 31 March 2015 217 271 488 a Property provisions mainly comprise onerous lease provisions arising from the rationalisation of the group’s property portfolio. The provisions will be utilised over the remaining lease periods, which range from one to 31 years. bOther provisions include amounts provided for legal or constructive obligations arising from insurance claims, litigation and regulatory risks, which will be utilised as the obligations are settled.

Deferred taxation Deferred tax is provided for in full on certain timing differences.

£m At 1 April 2014 1,075 Credit recognised in the profit and loss account (46) Charge recognised in reserves 8 At 31 March 2015 1,037

2015 2014 At 31 March £m £m Tax effect of timing differences due to: Excess capital allowances 1,112 1,168 Share-based payments (27) (29) Other (48) (64) Total provision for deferred taxation 1,037 1,075

The deferred taxation asset relating to the retirement benefit deficit is disclosed in note 15.

11. reconciliation of movement in equity shareholders’ funds Share Profit Share premium Other and loss

capitala accountb reservesd account Total £m £m £m £m £m At 1 April 2013 2,172 8,000 904 5,757 16,833 Profit for the yearc – – – 1,944 1,944 Actuarial losses – – – (1,531) (1,531) Tax on actuarial losses – – – 90 90 Share-based payments – – – 50 50 Tax on items taken directly to equity – – 6 – 6 Decrease in fair value of cash flow hedges – – (528) – (528) Dividends to holding company – – – (1,300) (1,300) Recognised in profit and loss account in the year – – 386 – 386 At 1 April 2014 2,172 8,000 768 5,010 15,950 Profit for the yearc – – – 2,510 2,510 Actuarial losses – – – (1,245) (1,245) Tax on actuarial losses – – – 258 258 Share-based payments – – – 70 70 Tax on items taken directly to equity – – 24 – 24 Increase in fair value of cash flow hedges – – 207 – 207 Dividends to holding company – – – (1,200) (1,200) Recognised in profit and loss account in the year – – (216) – (216) At 31 March 2015 2,172 8,000 783 5,403 16,358 a The allotted, called up and fully paid ordinary share capital of the company at 31 March 2015 and 31 March 2014 was £2,172m representing 8,689,755,905 ordinary shares of 25p each. b The share premium account, representing the premium on allotment of shares, and the capital redemption reserve are not available for distribution. c As permitted by Section 408(3) of the Companies Act 2006, no profit and loss account of the company is presented. The company’s profit for the financial year including dividends received from subsidiary undertakings was £2,510m (2013/14: £1,944m) before dividends paid of £1,200m (2013/14: £1,300m). d A breakdown of other reserves is provided in note 12.

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12. reconciliation of movement in other reserves Cash flow Capital redemption Total reservea reserveb other reserves £m £m £m At 1 April 2013 152 752 904 Net fair value losses (528) – (528) Recognised in profit and loss account in the year 386 – 386 Tax on items taken directly to equity 6 – 6 At 1 April 2014 16 752 768 Net fair value gains 207 – 207 Recognised in profit and loss account in the year (216) – (216) Tax on items taken directly to equity 24 – 24 At 31 March 2015 31 752 783 a The cash flow reserve is used to record the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Amounts recognised in profit and loss account in the year relate to fair value movements on derivatives. The items generating these foreign exchange movements are in designated cash flow hedge relationships. b The capital redemption reserve is not available for distribution.

13. related party transactions The company is a wholly owned subsidiary of BT Group Investments Limited, which is the immediate parent company. BT Group Investments Limited is a wholly owned subsidiary of the ultimate holding company and controlling entity, BT Group plc. Copies of the ultimate holding company’s financial statements may be obtained from The Secretary, BT Group plc, 81 Newgate Street, London EC1A 7AJ. The results of the company are included in the consolidated financial statements of BT Group plc. Consequently, the company is exempt under the terms of FRS 8, ‘Related Party Disclosures’, from disclosing details of transactions and balances with BT Group plc, fellow subsidiaries and associated undertakings, and other companies which are deemed to be under common control.

14. Financial commitments and contingent liabilities Financial commitments were as follows: 2015 2014 At 31 March £m £m Contracts placed for capital expenditure not provided in the accounts 491 394 Programme rights commitments 2,512 1,657 Total 3,003 2,051

At 31 March 2015 programme rights commitments, mainly relating to football broadcast rights, are those for which the licence period has not yet started. Future minimum operating lease payments for the company were as follows:

2015 2014 At 31 March £m £m Operating lease payments payable within one year of the balance sheet date were in respect of leases expiring: Within one year 11 11 Between one and five years 45 42 After five years 296 295 Total payable within one year 352 348

Operating lease commitments were mainly in respect of land and buildings which arose from a sale and operating leaseback transaction in a prior period. Leases have an average term of 17 years (2013/14: 18 years) and rentals are fixed for an average of 17 years (2013/14: 18 years). Other than as disclosed below, there were no contingent liabilities or guarantees at 31 March 2015, other than those arising in the ordinary course of the company’s business and on these no material losses are anticipated. The company has insurance cover to certain limits for major risks on property and major claims in connection with legal liabilities arising in the course of its operations. Otherwise, the company generally carries its own risks. Under the Broadband Delivery UK programme, grants received by the company may be subject to re-investment or repayment to the customer depending on the level of take-up. The company has provided guarantees relating to certain leases entered into by Telefónica UK Limited (formerly O2 UK Limited) prior to the demerger of mmO2 from BT on 19 November 2001. mmO2 plc (part of the Telefónica group) has given BT a counter indemnity for these guarantees. There is no exposure in the event of credit default in respect of amounts used to defease future lease obligations. The guarantee lasts until Telefónica UK Limited has discharged all its obligations, which is expected to be when the leases end on 30 January 2017. The company does not believe that there is any single current court action that would have a material adverse effect on the financial position or operations of the company. During 2014/15 the aggregate volume and value of legal actions which the company is party to reduced.

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15. retirement benefits Background The company has both defined benefit and defined contribution retirement benefit plans. These plans are in the UK and the largest by membership is the BT Pension Scheme (BTPS) which is a defined benefit plan that has been closed to new entrants since 31 March 2001. Subsequent to that date new entrants have been able to join a defined contribution plan, currently the BT Retirement Saving Scheme (BTRSS), a contract-based defined contribution arrangement.

Accounting under FRS 17 Profit and loss account 2015 2014 Year ended 31 March £m £m Current service cost – defined benefit plans 244 261 – defined contribution plans 135 115 Total operating charge 379 376 Expected return on pension plan assets (1,871) (2,028) Interest expense on pension plan liabilities 1,944 1,933 Net finance expense (income) 73 (95) Amount charged to profit before taxation 452 281

The total current service cost relating to defined benefit plans was £246m (2013/14: £263m) of which £2m (2013/14: £2m) has been recharged to subsidiary undertakings who are participating employers in the BTPS. The company retains the full liability for the BTPS. The profit and loss account charge in respect of defined contribution schemes represents the contributions payable by the company based upon a fixed proportion of employees’ pay. The company has no exposure to investment and other experience risk.

Amounts recognised in equity shareholders’ funds 2015 2014 Year ended 31 March £m £m Actuarial losses at 1 April (7,747) (6,216) Actuarial (losses) gains for the year: – arising on plan liabilities (3,989) 289 – arising on plan assets 2,745 (1,820) Effect of asset limit and acquisitions (1) – Net actuarial losses recognised for the year in equity shareholders’ funds (1,245) (1,531) Actuarial losses at 31 March (8,992) (7,747)

The history of actuarial gains and losses analysed between amounts arising from changes in assumptions and amounts arising from experience gains and losses is set out below:

2015 2014 2013 2012 2011 At 31 March £m £m £m £m £m Present value of defined benefit liability (50,779) (46,799) (47,040) (40,667) (38,754) Fair value of plan assets 43,403 39,939 41,344 38,345 37,034 Impact of asset ceiling (2) – – – – Net pension obligation (7,378) (6,860) (5,696) (2,322) (1,720) Actuarial (losses) gains arising from assumptions used to value the defined benefit liabilitya (4,431) 593 (6,078) (1,007) 4,656 Actuarial gains (losses) arising from experience adjustments on defined benefit liabilityb 442 (304) (142) (640) 258 Total actuarial (losses) gains arising on defined benefit liability (3,989) 289 (6,220) (1,647) 4,914 Total actuarial gains or losses arising on defined benefit liability as a percentage of the present value of the defined benefit liability 7.9% 0.6% 13.2% 4.0% 12.7% Actuarial gains (losses) arising from experience adjustment on plan assetsc 2,745 (1,820) 2,493 (1,073) 212 Actuarial gains or losses arising from experience adjustment on plan assets as a percentage of the plan assets 6.3% 4.6% 6.0% 2.8% 0.6%

a The actuarial losses or gains on defined benefit liabilities arising from changes in the assumptions used to value those liabilities at the year end compared with the assumptions used at the prior year end. This includes both financial assumptions, which are based on market conditions at the year end, and demographic assumptions such as life expectancy. b The actuarial losses or gains arising from experience adjustments on the defined benefit liabilities represent the impact on the liabilities of differences between actual experience during the year compared with the assumptions made. Such differences might arise, for example, from members choosing different benefit options at retirement, actual salary increases being different from those assumed, or actual benefit increases being higher than the long-term inflation assumption. c The actuarial losses or gains arising from experience adjustments on plan assets represent the difference between actual investment performance in the year and the expected rate of return on assets assumed at the start of the year.

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15. retirement benefitscontinued Balance sheet The net pension obligation in respect of defined benefit plans reported in the balance sheet is set out below:

2015 2014 Present Present value of value of Assets liabilities Deficit Assets liabilities Deficit At 31 March £m £m £m £m £m £m BTPS 43,386 (50,715) (7,329) 39,939 (46,759) (6,820) Other plansa 17 (64) (47) – (40) (40) Total asset (deficit) 43,403 (50,779) (7,376) 39,939 (46,799) (6,860) Impact of asset ceiling (2) – Deferred tax asset 1,477 1,373 Net pension obligation (5,901) (5,487)

a Included in the present value of liabilities of other plans is £49m (2013/14: £40m) related to unfunded pension arrangements.

At 31 March 2015, £9m (2013/14: £8m) of contributions to defined contribution plans were outstanding and are reported under other creditors on the balance sheet.

Movements in defined benefit plan assets and liabilities are shown below: Assets Liabilities Asset ceiling Deficit £m £m £m £m At 1 April 2013 41,344 (47,040) – (5,696) Current service cost – (263) – (263) Interest income (expense) 2,028 (1,933) – 95 Actuarial (loss) gaina (1,820) 289 – (1,531) Regular contributions by employer 210 – – 210 Deficit contributions by employer 325 – – 325 Contributions by employees 11 (11) – – Benefits paid (2,159) 2,159 – – At 1 April 2014 39,939 (46,799) – (6,860) Acquisitiona 15 (14) (1) – Current service cost – (246) – (246) Interest income (expense) 1,871 (1,944) – (73) Actuarial gain (loss)b 2,745 (3,989) (1) (1,245) Regular contributions by employer 171 – – 171 Deficit contributions by employer 875 – – 875 Contributions by employees 10 (10) – – Benefits paid (2,223) 2,223 – – At 31 March 2015 43,403 (50,779) (2) (7,378)

a Arising from an intra-group reorganisation. b Actual return on plan assets in 2014/15 was £4,616m (2013/14: £208m).

BTPS Management of the scheme BT Pension Scheme Trustees Limited (the Trustee) has been appointed by BT as an independent Trustee to administer and manage the scheme on behalf of the members in accordance with the terms of the Trust Deed of the scheme and relevant legislation. Under the terms of the Trust Deed there are nine Trustee directors all of whom are appointed by BT. The Chairman of the Trustee is appointed after consultation with, and with the agreement of, the relevant trade unions who are also responsible for nominating four directors to act as representatives of the members. Of the remaining four directors, two will normally hold senior positions within the group, and two will normally hold (or have held) senior positions in commerce or industry. Subject to there being an appropriately qualified candidate at least one of the Trustee directors is customarily a current pensioner or deferred pensioner of the BTPS. Trustee directors are usually appointed for a three-year term, but are then eligible for re-appointment.

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15. retirement benefitscontinued BTPS assets 2015 2014

Expected Expected long-term rate long-term rate a Asset fair value of return Asset fair value of return At 31 March £bn (total) % (total) % pa £bn % % pa UK equities 0.8 2 n/a 2.6 7 6.30 Non-UK equities 12.3 28 n/a 8.6 21 6.30 Fixed-interest securities 7.4 17 n/a 7.1 18 3.80 Index-linked securities 11.7 27 n/a 9.9 24 3.20 Property 4.6 11 n/a 4.3 11 6.00 Alternative assetsb 6.2 14 n/a 7.1 18 5.00 Cash and other 0.4 1 n/a 0.3 1 2.60 Total 43.4 100 n/a 39.9 100 4.80

a The company will be adopting FRS101 from 1 April 2015, under which assumptions for the expected long-term rate of return are not required. b Alternative asset classes include commodities, private equity and credit opportunities.

The BTPS assets are invested in UK and non-UK equities, UK and overseas properties, fixed-interest and index-linked securities, alternative assets comprising hedge funds, private equity and credit opportunities, and deposits and short-term investments. At 31 March 2015 and 31 March 2014, the scheme’s assets did not include any directly held ordinary shares of the ultimate parent company, BT Group plc. However, the Scheme held £9m (2013/14: £9m) of index-linked bonds issued by the company.

BTPS liabilities The present value of the obligation is derived from long-term cash flow projections and is thus inherently uncertain. The rate of inflation influences the assumptions for salary and pension increases. Details of the actuarial assumptions are disclosed in note 18 of the consolidated financial statements of BT plc.

Cash contributions to the BTPS The company has made the following contributions to the BTPS: 2015 2014 Year ended 31 March £m £m Ordinary contributions 168 205 Deficit contributions 875 325 Total contributions in the year 1,043 530

The company made a deficit contribution payment of £625m in April 2015 and expects to make further contributions of approximately £510m to the BTPS in 2015/16, comprising ordinary contributions of approximately £260m and deficit contributions of £250m. Details of the valuation methodology of scheme assets and liabilities, funding valuation and future funding obligations are disclosed in note 18 of the consolidated financial statements of BT plc.

16. Employees and directors The average number of persons employed by the company (including directors) during the year was:

2015 2014 Year ended 31 March 000 000 a Average monthly number of employees 66.7 67.5

The aggregate staff costs were as follows: 2015 2014 Year ended 31 March £m £m Wages and salaries 2,711 2,755 Share-based payments 57 50 Social security 324 319 Other pension costs 379 376 3,471 3,500 a Includes an average of 25 non-UK employees (2013/14: 35 employees).

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17. Directors’ remuneration Information covering directors’ remuneration, interests in shares and share options of BT Group plc, (the ultimate parent) and pension benefits is included in note 26 to the consolidated financial statements of BT plc.

18. Derivatives All of the company’s derivative financial instruments are held at fair value on the company’s balance sheet. The fair values of outstanding swaps and foreign exchange contracts are estimated using discounted cash flow models and market rates of interest and foreign exchange at the balance sheet date.

Current Non current Current Non current Derivatives asset asset liability liability At 31 March 2015 £m £m £m £m Designated in a cash flow hedge 86 941 161 698 Designated in a fair value hedge 6 143 – – Other 5 148 7 229 Total derivatives 97 1,232 168 927

Current Non current Current Non current Derivatives asset asset liability liability At 31 March 2014 £m £m £m £m Designated in a cash flow hedge 73 394 74 514 Designated in a fair value hedge 6 61 – – Other 35 84 65 165 Total derivatives 114 539 139 679

During the year the company deferred a gain of £nil (2013/14: £16m) relating to the fair value of a derivative energy contract at initial recognition. At 31 March 2015 the amount deferred which is not yet recognised in the income statement is £14m (2013/14: £14m). With the exception of this contract which is included at Level 3, and valued using assumptions on volumes, inflation, and market energy prices, all other derivative financial instruments are categorised at Level 2 of the fair value hierarchy as defined on page 97.

Hedging activities Derivatives may qualify as hedges for accounting purposes if they meet the criteria for designation as fair value hedges or cash flow hedges in accordance with FRS 26.

Cash flow hedges Instruments designated in a cash flow hedge include interest rate swaps and cross-currency swaps hedging Euro and US Dollar denominated borrowings. Forward currency contracts are taken out to hedge step-up interest on currency denominated borrowings relating to our 2030 US Dollar bond. The hedged cash flows will affect profit or loss as interest and principal amounts are repaid over the remaining term of the borrowings (see note 7). Forecast foreign currency purchases, principally denominated in US Dollar, Euro and Asia Pacific currencies are hedged 12 months forward, with certain specific transactions hedged further forward. The related cash flows will be recognised in the income statement over this period. All cash flow hedges were fully effective in the period. See note 12 for details of the movements in the cash flow hedge reserve.

Fair value hedges Fair value hedges consist of interest rate and cross-currency swaps that are used to protect against changes in the fair value of the 2028 Sterling bond due to movements in market interest rates. The fair value movement on derivatives designated as hedging instruments in fair value hedges was a credit of £82m (2013/14: charge of £47m).

Other derivatives The company’s policy is not to use derivatives for speculative purposes. However, due to the complex nature of hedge accounting under FRS 26, some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more appropriate. Derivative instruments that do not qualify for hedge accounting are classified as held for trading and held at fair value through profit or loss under FRS 26.

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18. Derivatives continued Fair value of financial instruments The fair values of listed investments were estimated based on quoted market prices for those investments. The carrying value of floating rate investments approximated to their fair values due to the frequent re-set of interest rates to market rates. The carrying amount of the short-term deposits and investments approximated to their fair values due to the short maturity of the investments held. The carrying amount of trade receivables and payables approximated to their fair values due to the short maturity of the amounts receivable and payable. The fair value of the company’s bonds, finance leases and other long-term borrowings has been estimated on the basis of quoted market prices for the same or similar issues with the same maturities where they existed, and on calculations of the present value of future cash flows using the appropriate discount rates in effect at the balance sheet dates, where market prices of similar issues did not exist. The carrying value of floating rate borrowings approximated to their fair values due to the frequent re-set of interest rates to market rates. The fair value of the company’s outstanding swaps and foreign exchange contracts were the estimated amounts, calculated using discounted cash flow models that the company would receive or pay in order to terminate such contracts in an arm’s length transaction taking into account market rates of interest and foreign exchange of the balance sheet date.

Carrying amount Fair value 2015 2014 2015 2014 £m £m £m £m Non-derivatives: Financial liabilities Listed bonds 9,064 9,038 10,919 10,597 Finance leases 298 56 298 56 Other loans and borrowings 39,712 40,159 39,712 40,159

19. Audit services Information relating to fees for audit services paid or payable to the company’s auditor, PricewaterhouseCoopers LLP, is included in note 7 to the consolidated financial statements of BT plc.

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SUBSIDIARY UNDERTAKINGS The table below gives brief details of the group’s principala operating subsidiariesb at 31 March 2015. All subsidiaries are unlisted, unless otherwise stated. No subsidiaries are excluded from the group consolidation. The group did not have any significant associates or joint ventures at 31 March 2015. Group interest Country c d Subsidiary undertakings Activity in allotted capital of operation BT Americas Incd,e Communications-related services, systems integration and 100% common International products provider BT Australasia Pty Limitede Communications-related services and products provider 100% ordinary Australia 100% preference e BT Business Direct Limited Technology equipment retailer 100% ordinary UK BT Communications do Brasil Limitadab,e Communications-related services, technology consulting 100% common Brazil and products provider BT Communications Ireland Limitede Telecommunications services provider 100% ordinary Republic of Ireland e BT Conferencing Inc Audio, video and web collaboration services provider 100% common US e BT Conferencing Video Inc Audio, video and web collaboration services provider 100% common US BT ESPANA, Compania de Servicios Globales de Communications-related services and products provider 100% ordinary Spain e Telecommunicaciones, SA

BT Fleet Limited Fleet management company 100% ordinary UK BT France SAe Communications-related services, systems integration and 100% ordinary France products provider e,f BT (Germany) GmbH & Co. oHG Communications-related services and products provider 100% ordinary Germany e BT Global Communications India Private Limited Communications-related services 74% ordinary India e BT Global Services Limited International telecommunications network systems provider 100% ordinary UK BT Holdings Limited Investment holding company 100% ordinary UK BT Hong Kong Limitede Communications-related services and products provider 100% ordinary hong Kong 100% preference BT Italia SpAe Communications-related services and products provider 98.6% ordinary Italy g BT IT Services Limited IT solutions provider 100% ordinary UK e BT Latam Argentina SA Communications-related services and products provider 100% common Argentina e BT Limited International telecommunications network systems provider 100% ordinary International BT Managed Services Limited Communications-related services and products provider 100% ordinary UK BT Nederland NV Communications-related services and products provider 100% ordinary Netherlands BT Payment Services Limited Payment services provider 100% ordinary UK e BT Services SA Technology consulting and engineering services 100% ordinary France e BT Singapore Pte Ltd Communications-related services and products provider 100% ordinary Singapore e BT Switzerland AG Communications-related services and products provider 100% ordinary Switzerland d,e Communications Global Network Services Limited Communications-related services and products provider 100% ordinary International e Communications Networking Services (UK) Communications-related services and products provider 100% ordinary UK dabs.com plc Technology equipment retailer 100% ordinary UK Plusnet plc Broadband service provider 100% ordinary UK Radianz Americas Ince Global managed network service provider 100% common US 100% preference a The group comprises a large number of entities and it is not practical to include all of them in this list. The list therefore includes only those entities that have a significant impact on the revenue, profit or assets of the group. A full list of subsidiaries, joint ventures and associates will be annexed to the company’s next annual return filed with the Registrar of Companies. b The principal operating subsidiaries (listed above) have a reporting date of 31 March, except for entities domiciled in Brazil, due to regulatory requirements. c The proportion of voting rights held corresponds to the aggregate interest percentage held by the holding company and subsidiary undertakings. d All overseas undertakings are incorporated in their country of operations. Subsidiary undertakings operating internationally are all incorporated in England and Wales, except BT Americas Inc and Communications Global Network Services Limited which are incorporated in the US and Bermuda, respectively. e Held through intermediate holding company. f  BT (Germany) GmbH & Co. oHG is making use of disclosure exemptions under the German Commercial Code paragraph 264. g On 12 May 2014, BT Engage IT Limited changed its name to BT IT Services Limited.

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ADDITIONAL INFORMATION Alternative performance measures Introduction We assess the performance of the group using a variety of alternative performance measures. We principally discuss the group’s results on an ‘adjusted’ basis. The rationale for using adjusted measures is explained below. Results on an adjusted basis are presented before specific items. We also explain financial performance using measures that are not defined under IFRS and are therefore termed ‘non-GAAP’ measures. The non-GAAP measures we use are: the trend in underlying revenue excluding transit, and in underlying operating costs excluding transit, as well as in reported and adjusted EBITDA. A reconciliation from these non-GAAP measures to the nearest measure prepared in accordance with IFRS is presented below. The alternative performance measures we use may not be directly comparable with similarly titled measures used by other companies.

Specific items The group’s income statement and segmental analysis separately identify trading results before specific items. The directors believe that presentation of the group’s results in this way is relevant to an understanding of the group’s financial performance, as specific items are identified by virtue of their size, nature or incidence. This presentation is consistent with the way that financial performance is measured by management and reported to the BT Group plc Board and the Operating Committee and assists in providing a meaningful analysis of the trading results of the group. In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Examples of charges or credits meeting the above definition and which have been presented as specific items in the current and/or prior years include disposals of businesses and investments, regulatory settlements, historic insurance or litigation claims, business restructuring programmes, asset impairment charges, property rationalisation programmes, net interest on pensions and the settlement of multiple tax years. In the event that other items meet the criteria, which are applied consistently from year to year, they are also treated as specific items. Specific items are disclosed in note 8 to the consolidated financial statements.

Trends in underlying revenue and operating costs Underlying revenue and underlying operating costs are measures which seek to reflect the underlying performance of the group that will contribute to long-term sustainable, profitable growth. As such they exclude the impact of acquisitions or disposals, foreign exchange movements and specific items. We focus on the trends in underlying revenue and underlying operating costs excluding transit, as transit traffic is low-margin and is significantly affected by reductions in mobile termination rates. A reconciliation from the decrease in reported revenue and reported operating costs, the most directly comparable IFRS measures, to the decrease in underlying revenue and underlying operating costs excluding transit, is set out below.

2015 2014 2013 Year ended 31 March % % % (Decrease) increase in reported revenue (1.7) 1.0 (4.7) Specific items (0.7) (1.3) (0.8) Decrease in adjusted revenue (2.4) (0.3) (5.5) Transit revenue 0.6 1.0 1.3 Acquisitions and disposals – (0.1) 0.2 Foreign exchange movements and other 1.4 (0.1) 0.9 (Decrease) increase in underlying revenue excluding transit (0.4) 0.5 (3.1)

2015 2014 2013 Year ended 31 March % % % Decrease in reported operating costs (4.3) (0.1) (5.9) Depreciation and amortisation 0.4 1.2 (0.3) (Decrease) increase in reported operating costs before depreciation and amortisation (3.9) 1.1 (6.2) Specific items (1.0) (1.3) (2.5) Decrease in adjusted operating costs before depreciation and amortisation (4.9) (0.2) (8.7) Transit costs 1.0 1.5 1.5 Acquisitions and disposals – (0.1) 0.2 Foreign exchange movements and other 1.5 (0.2) 1.3 (Decrease) increase in underlying operating costs before depreciation and amortisation excluding transit (2.4) 1.0 (5.7)

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Alternative performance measures continued EBITDA In addition to measuring financial performance of the group and lines of business based on operating profit, we also measure performance based on EBITDA and adjusted EBITDA. EBITDA is defined as the group profit before depreciation, amortisation, net finance expense and taxation. Adjusted EBITDA is defined as EBITDA before specific items. EBITDA is a common measure used by investors and analysts to evaluate the operating financial performance of companies, particularly in the telecommunications sector. We consider EBITDA and adjusted EBITDA to be useful measures of our operating performance because they approximate the underlying operating cash flow by eliminating depreciation and amortisation. EBITDA and adjusted EBITDA are not direct measures of our liquidity, which is shown by our cash flow statement, and need to be considered in the context of our financial commitments. Within the lines of business we may also consider our performance using an underlying EBITDA measure, which additionally excludes the impact of acquisitions and disposals and foreign exchange. A reconciliation from group operating profit, the most directly comparable IFRS measure, to reported and adjusted group EBITDA, is set out below. A reconciliation between operating profit and adjusted EBITDA for our lines of business is set out in note 4 to the consolidated financial statements. 2015 2014 2013 Year ended 31 March £m £m £m Operating profit 3,486 3,147 2,952 Depreciation and amortisation 2,538 2,695 2,843 Reported EBITDA 6,024 5,842 5,795 Specific items 253 276 352 Adjusted EBITDA 6,277 6,118 6,147

Cautionary statement regarding forward-looking statements Certain statements in this Annual Report are forward-looking and are made in reliance on the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements include, without limitation, those concerning: current and future years’ outlook; revenue and revenue trends; EBITDA; proposed acquisitions and related forecasts; net debt; capital expenditure; credit ratings; the group-wide restructuring programme, cost transformation plans and restructuring costs; investment in and rollout of our fibre network, and its reach, innovations, increased speeds and speed availability; our broadband-based service and strategy; our investment in TV, enhancing our TV service and BT Sport; the BT Pension Scheme recovery plan, operating charge, regular cash contributions and interest expense; effective tax rate; growth opportunities in networked IT services, the pay-TV services market, broadband and mobility and future voice; growth of, and opportunities available in, the communications industry and BT’s positioning to take advantage of those opportunities; expectations regarding competition, market shares, prices and growth; expectations regarding the convergence of technologies; plans for the launch of new products and services; network performance and quality; the impact of regulatory initiatives, decisions and outcomes on operations, including the regulation of the UK fixed wholesale and retail businesses and the impact of the Undertakings to Ofcom under the Enterprise Act; BT’s possible or assumed future results of operations and/or those of its associates and joint ventures; investment plans; adequacy of capital; financing plans and refinancing requirements; demand for and access to broadband and the promotion of broadband by third-party service providers; anticipated financial and other benefits and synergies resulting from BT Group’s plc proposed acquisition of EE, including revenue, operating cost and capital expenditure synergies; our plans and objectives following completion of the acquisition; and those statements preceded by, followed by, or that include the words ‘aims’, ‘believes’, ‘expects’, ‘anticipates’, ‘intends’, ‘will’, ‘should’ or similar expressions. Although BT believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences between actual results and those implied by the forward-looking statements include, but are not limited to: material adverse changes in economic conditions in the markets served by BT; future regulatory actions, decisions, conditions or requirements in BT’s operating areas, including competition from others; selection by BT of the appropriate trading and marketing models for its products and services; technological innovations, including the cost of developing new products, networks and solutions and the need to increase expenditures for improving the quality of service; the anticipated benefits and advantages of new technologies, products and services not being realised; developments in the convergence of technologies; external threats to cyber security data or resilience; prolonged adverse weather conditions resulting in a material increase in overtime, staff or other costs or impact on customer service; the timing of entry and profitability of BT in certain markets; significant changes in market shares for BT or its principal products and services; fluctuations in foreign currency exchange rates or interest rates; the underlying assumptions and estimates made in respect of major customer contracts proving unreliable; the aims of the group-wide restructuring programme not being achieved; uncertainties and assumptions relating to the proposed EE acquisition by BT Group plc, conditions of the acquisition (including regulatory approval) not being satisfied and the anticipated synergies, strategic benefits and return on investment not being realised; and general financial market conditions affecting BT’s performance and ability to raise finance. Certain of these factors are discussed in more detail elsewhere in this Annual Report including, without limitation, in Our risks on pages 17 to 25 and EE acquisition: risks on pages 26 to 28. BT undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

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Background Telephone services in almost all of the UK were, until 1981, provided by the Post Office, which was a government department until 1969 when it was established as a state public corporation. In 1981, the postal and telecommunications services of the Post Office became the responsibility of two separate corporations, with British Telecommunications – under the trading name of British Telecom – taking over the telecommunications business. British Telecommunications plc, the successor to the statutory corporation British Telecommunications, was incorporated in England and Wales on 1 April 1984 as a public limited company, wholly owned by the UK Government, as a result of the Telecommunications Act 1984. Between November 1984 and July 1993, the UK Government sold all of its shareholding in three public offerings. BT Group plc was formed when the mmO2 business, comprising what had been BT’s mobile activities in the UK, the Netherlands, Germany and the Republic of Ireland, was demerged on 19 November 2001. British Telecommunications plc (BT plc) shares ceased trading on the London, New York and Tokyo stock exchanges on 16 November 2001. BT Group plc’s shares commenced trading on the London and New York stock exchanges on 19 November 2001. As a result of the transaction BT plc became a wholly-owned subsidiary of BT Group Investments Limited (BTGI), itself wholly owned by BT Group plc. Accordingly, the ordinary shares of BT plc were de-listed from the London Stock Exchange on 19 November 2001. The registered office address of BT is 81 Newgate Street, London EC1A 7AJ. The company’s agent in the US is Richard Nohe, 620 Eighth Avenue, New York, NY 10018, US.

Articles of Association (Articles) The following is a summary of the principal provisions of BT’s Articles, a copy of which has been filed with the Registrar of Companies. New Articles of Association were adopted on 5 August 2010, largely to take account of changes in UK company law brought about by the Companies Act 2006 (2006 Act). Under the 2006 Act, the Memorandum of Association serves a more limited role as historical evidence of the formation of the company. Since August 2010, the provisions in relation to objects in BT’s Memorandum are deemed to form part of BT’s Articles, and have been deleted from those Articles because of shareholders passing a resolution to this effect. Under the 2006 Act, BT’s objects are unrestricted.

Articles (a) Voting rights In the following description of the rights attaching to the shares in the company, a ‘holder of shares’ and a ‘member’ is, in either case, the person registered in the company’s register of members as the holder of the relevant shares. Subject to certain restrictions, on a show of hands, every member present in person or by proxy at any general meeting has one vote and, on a poll, every member present in person or by proxy has one vote for each share which they hold. Voting at any meeting of members is by a show of hands unless a poll is demanded by the chairman of the meeting or by any member at the meeting who is entitled to vote (or the member’s proxy). (b) Changes in capital The company may by ordinary resolution: (i) consolidate, or consolidate and then divide, all or any of its share capital into shares of a larger amount than its existing shares; (ii) divide its shares, or any of them, into shares of a smaller amount and the resolution may decide that, as between the shares resulting from the division, any of them may have any preference or advantage as compared with the others. The company may also: (i) buy back its own shares; and (ii) by special resolution reduce its share capital, any capital redemption reserve and any share premium account. (c) Dividends The company’s members can declare dividends by passing an ordinary resolution, in addition to the powers of the Board, but no dividend can exceed the amount recommended by the Board. Dividends must be paid out of profits available for distribution. If the directors consider that the profits of the company justify such payments, they can pay interim and final dividends. Fixed dividends will be paid on any class of share on the dates stated for the payments of those dividends. Any dividend which has not been claimed for 10 years after it was declared or became due for payment will be forfeited and belong to the company again unless the directors decide otherwise. (d) Distribution of assets on winding up If the company is wound up (whether the liquidation is voluntary, under supervision of a court or by a court) the liquidator can, with the authority of a special resolution passed by the members, divide among the members all or any part of the assets of the company. This applies whether the assets consist of property of one kind or different kinds. For this purpose, the liquidator can place whatever value the liquidator considers fair on any property and decide how the division is carried out between members or different groups of members. The liquidator can also, with the same authority, transfer any assets to trustees upon trusts for the benefit of members which the liquidator decides. The liquidation of the company can then be finalised and the company dissolved. No past or present members can be compelled to accept any shares or other property under BT’s Articles which could give them a liability.

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Articles continued (e) Transfer of shares Shares of the company may only be transferred in writing and either in the usual form or another form approved by the Board. A transfer form must be signed or made effective in some other way, by or on behalf of the person making the transfer and, unless the share is fully paid, by or on behalf of the person to whom the shares are being transferred. (f) General meetings The Board can decide to call general meetings. If there are not enough directors in the UK to call a general meeting, any director or member may call a general meeting. (g) Limitations on rights of non-resident or foreign shareholders There are no limitations on the rights of non-resident or foreign shareholders. (h) Directors Directors’ remuneration The directors are entitled to the remuneration set by the company by an ordinary resolution. The directors may be paid their expenses properly incurred in connection with the business of the company. The directors can decide whether to provide pensions, annual payments or other allowances or benefits to any people including people who are or were directors of the company. The Board can decide to extend these arrangements to relations or dependants of, or people connected to these people. The Board can also decide to contribute to a scheme or fund or to pay premiums to a third party for these purposes. However, the company can only provide pension and other similar benefits to any director or former director who has not been employed by or held any other office or executive position, in BT Group plc or any of its subsidiary undertakings, including the company, or to relations or dependants of, or people connected to, those directors or former directors, if the members approve this by passing an ordinary resolution.

(i) Directors’ votes A director need not be a member, but a director who is not a member can still attend and speak at members’ meetings. Unless BT’s Articles say otherwise, a director cannot vote on a resolution about a contract in which the director has an interest (this will also apply to interests of a person connected with the director). If the legislation allows, a director can vote and be counted in the quorum on a resolution concerning a contract:

(I) in which the director has an interest of which the director is not aware; or which cannot reasonably be regarded as likely to give rise to a conflict of interest; (II) in which the director has an interest only because the director is a holder of shares, debentures or other securities of BT, or by reason of any other interest in or through BT; (III) which involves the giving of any security, guarantee or indemnity to the director or any other person for: money lent or obligations incurred by the director or by any other person at the request of or for the benefit of BT or the benefit of any of its subsidiary undertakings; or a debt or other obligation which is owed by BT or any of its subsidiary undertakings to that other person if the director has taken responsibility for all or any part of that debt or obligation by giving a guarantee, security or indemnity; (IV) where BT or any of its subsidiary undertakings is offering any shares, debentures or other securities for subscription or purchase to which the director is or may be entitled to participate as a holder of BT or BT Group plc securities; or where the director will be involved in the underwriting or sub-underwriting; (V) relating to any other company in which the director has an interest, directly or indirectly (including holding a position in that company) or is a shareholder, creditor, employee or otherwise involved in that company. These rights do not apply if the director owns 1% or more of that company or of the voting rights in that company; (VI) relating to an arrangement for the benefit of BT employees or former employees of BT or any of BT’s subsidiary undertakings which only gives the directors the same benefits that are generally given to the employees or former employees to whom the arrangement relates; (VII) relating to BT buying or renewing insurance for any liability for the benefit of directors or for the benefit of persons who include directors; (VIII) relating to the giving of indemnities in favour of directors; (IX) relating to the funding of expenditure by any director or directors: on defending criminal, civil or regulatory proceedings or actions against the director or the directors; in connection with an application to the court for relief; or on defending the director or the directors in any regulatory investigations; or which enables any director or directors to avoid incurring expenditure as described in this paragraph; and (X) in which the director’s interest, or the interest of directors generally, has been authorised by an ordinary resolution.

Subject to the relevant legislation, the members can by passing an ordinary resolution ratify any particular contract or arrangement carried out in breach of those provisions.

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Articles continued (j) Retirement of directors No person will be prevented from being or becoming a director simply because that person has reached the age of 70. (k) Directors’ borrowing powers To the extent that the legislation and BT’s Articles allow, the Board may exercise all the powers of the company to borrow money, to mortgage or charge its business, property and assets (present and future) and to issue debentures and other securities, and give security either outright or as collateral security for any debt, liability or obligation of the company or another person.

Further note on certain activities During 2014/15, certain of the group’s non-US subsidiaries or other non-US entities conducted limited activities in, or with persons from, certain countries identified by the US Department of State as State Sponsors of Terrorism or otherwise subject to US sanctions. These activities, which generally relate to the provision of communications services to embassies and diplomatic missions of US-allied governments, other CPs, news organisations, multinational corporations and other customers that require global communications connectivity, are insignificant to the group’s financial condition and results of operations. Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13 (r) to the Securities Exchange Act of 1934, we are required to disclose whether BT or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or certain designated individuals or entities. Disclosure is required even when the activities were conducted outside the US by non-US entities and even when they were conducted in compliance with applicable law. Our disclosures for 2014/15 are below. BT Group plc has a contract in place with Telecommunications Infrastructure Company (TIC), to make and receive voice calls from Iran to the UK. These payments are subject to HM Treasury approval. BT entered into a Framework Agreement with Rafsanjan Industrial Complex (RIC) for business consultancy services in May 2010 and provided an initial consultancy engagement under phase 1 of the agreement. In February 2011, phase 2 was agreed with RIC however BT stopped work in December 2011 due to the geopolitical situation. RIC made an advance payment to BT of €384,120 to carry out the phase 2 work. We continue to explore whether the amount can be refunded.

Limitations affecting security holders There are no limitations under the laws of the United Kingdom restricting the right of non-residents to hold or to vote shares in the company.

Documents on display All reports and other information that BT files with the US Securities and Exchange Commission (SEC) may be inspected at the SEC’s public reference facilities at Room 1580, 100 F Street, NE Washington, DC, 20549, US. These reports may be accessed via the SEC’s website at www.sec.gov.

Material contracts The contracts summarised below (not being entered into in the ordinary course of business) have been entered into in the two years preceding the date of this document by, BT Group plc or another member of the group and are, or may be, material to the group or have been entered into by, BT Group plc or another member of the group and contain a provision under which a member of the group has an obligation or entitlement which is, or may be, material to, BT Group plc or such other member of the group.

Definitions The definitions from the shareholder circular apply to the followingsummary of the principal terms of the proposed acquisition of EE by BT Group plc and Financial effects of the acquisition considered in the shareholder circular. For reference and understanding, we set out certain of these definitions below. Acquisition: the proposed acquisition by BT Group plc of EE Acquisition Resolution: the Resolution to approve the Acquisition and to grant the Directors specific authority to allot the Consideration Shares Articles: the articles of association of BT Group plc in force from time to time Board: the Directors of BT Group plc from time to time BT Pension Scheme: BT’s main defined benefit pension scheme Buy-Back Resolution: the resolution to approve the buy-back of Ordinary Shares from Deutsche Telekom and/or Orange pursuant to the CP Contracts CP Contracts: the DT CP Contract and Orange CP Contract Completion: completion of the Acquisition pursuant to the terms of the Share Purchase Agreement Conditions: the conditions to Completion as set out in the Share Purchase Agreement Consideration Shares: the Ordinary Shares to be issued by BT Group plc to the Sellers pursuant to the Share Purchase Agreement Directors or Board of Directors: the directors of BT Group plc whose names appear in the section in the shareholder circular entitled Directors, Company Secretary, Registered Office and Advisers Enlarged Group: BT Group plc and its subsidiaries and subsidiary undertakings, including EE and its subsidiaries and subsidiary undertakings, after the Acquisition and from time to time thereafter Financial Investor: a Qualified Institutional Buyer as defined in Rule 144A under the US Securities Act 1933 or a Qualified Investor as described in Section I(1) of Annex II to Directive 2004/39/EC, other than any activist fund, or any company licensed as a telecommunications operator (or its affiliates) General Meeting: the general meeting of BT Group plc held at 10.00 a.m. on 30 April 2015 to approve the Resolutions Long Stop Date: 5 August 2016

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Definitionscontinued Ordinary Shares: the ordinary shares of nominal value 5 pence each in the capital of BT Group plc, including, if the context requires, the Consideration Shares Regulations: the Uncertificated Securities Regulations 2001 of the United Kingdom Resolutions: the Resolutions set out in the Notice of General Meeting Sellers: Deutsche Telekom and Orange Shareholder: a holder of Ordinary Shares and ‘Shareholders’ shall be construed accordingly Sponsor: J.P. Morgan Cazenove Transaction Documents: the Share Purchase Agreement, the Relationship Agreement, the Standstill and Lock-up Agreement and the CP Contracts

Summary of the principal terms of the proposed acquisition of EE by BT Group plc Part A Share Purchase Agreement On 5 February 2015, the Share Purchase Agreement was entered into between BT Group plc, the Sellers, who hold 100% of the issued share capital of EE on a combined basis, Deutsche Telekom AG as guarantor of Deutsche Telekom and Orange SA as guarantor of Orange. Pursuant to the Share Purchase Agreement, the Sellers have conditionally agreed to sell, and BT Group plc has conditionally agreed to acquire, the entire issued share capital of EE.

1. Purchase price 1.1 Consideration adjustments Under the terms of the Share Purchase Agreement, BT Group plc will purchase the entire issued share capital of EE for a purchase price equivalent to £12.5bn on a debt and cash free basis. The purchase price to be paid is subject to customary post-Completion adjustments to reflect the debt, cash, working capital and capex position of EE at Completion. Based upon EE’s net debt as at 31 December 2014, adjusted for estimated other debt-like items, the consideration payable by BT Group plc will be satisfied by: (a) the issue to Deutsche Telekom of around 1.2bn new Ordinary Shares, equivalent to 12% of BT Group plc’s share capital on an enlarged basis post-Acquisition; (b) a residual cash payment to Deutsche Telekom of around £200m based upon a reference price of 411.5 pence per Ordinary Share, being the closing price on 4 December 2014 (subject to further variation in accordance with the cap and collar protection mechanism described below); (c) the issue to Orange of around 0.4bn new Ordinary Shares, equivalent to 4% of BT Group plc’s share capital on an enlarged basis post- Acquisition; and (d) a residual cash payment to Orange of around £3.4bn based upon a reference price of 411.5 pence per Ordinary Share (subject to further variation in accordance with the cap and collar protection mechanism described below). The Consideration Shares will be issued at Completion, credited as fully paid and will rank pari passu in all respects with the existing Ordinary Shares, including the right to receive all dividends, distributions or any return of capital declared, made or paid after Completion.

1.2 Cap and collar mechanism The Share Purchase Agreement contains a cap and collar protection mechanism which provides for an adjustment to the cash element of the consideration where there is a movement in the price of an Ordinary Share (measured by reference to the average Ordinary Share price in the 15 trading days before the date which is five Business Days before Completion) from the reference price set out above, subject to: (a) a minimum share price per Ordinary Share of approximately 395.0 pence (being 4% below the reference price). A share price below this level would not result in further adjustment to the cash consideration and therefore the value of the Acquisition would fall below £12.5bn; and (b) a maximum share price per Ordinary Share of approximately 428.0 pence (being 4% above the reference price). A share price above this level would not result in further adjustment to the cash consideration and therefore the value of the Acquisition would increase above £12.5bn. If the cash element of the consideration due to Deutsche Telekom is estimated to be less than zero at Completion (as a result of EE’s estimated adjusted net debt position as at Completion), BT Group plc can reduce the number of Ordinary Shares to be issued to Deutsche Telekom by such number as results in the cash consideration payable to Deutsche Telekom then being as near as possible to zero. In such circumstances, Deutsche Telekom would then receive less than 12% of BT Group plc’s enlarged issued share capital as a result of the Acquisition.

2. Conditions Completion is conditional upon satisfaction or, where capable of being waived, waiver of the following Conditions prior to the Long Stop Date (or such later date as the parties may agree): (a) passing the Acquisition Resolution; (b) allotment of the Consideration Shares to the Sellers, subject only to their admission to listing and trading; (c) the UK Listing Authority having approved the admission of the Consideration Shares to the Official List and the London Stock Exchange having approved admission of the Consideration Shares to trading with effect from Completion;

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2. Conditions continued (d) clearance of the Acquisition by the CMA, meaning: (i) clearance of the Acquisition by the CMA at Phase 1 unconditionally, or conditionally on BT Group plc giving remedies, which are at BT Group plc’s sole discretion to agree (but in co-ordination and consultation with the Sellers); or (ii) clearance of the Acquisition by the CMA at Phase 2 unconditionally, or conditionally on BT Group plc giving remedies, which are to be agreed by BT Group plc acting reasonably and in co-ordination and consultation with the Sellers, provided that BT Group plc shall not be required to give any remedy which would have a material adverse effect on BT Group plc or the EE Group, or would not be reasonable from a financial or strategic perspective, and in the event that BT Group plc agrees such remedies, the Sellers shall share the cost of such remedies by way of a reasonable reduction in the purchase price for the Acquisition; (e) or, if the Acquisition is referred to the European Commission, clearance of the Acquisition by the European Commission, meaning; (i) clearance of the Acquisition by the European Commission under Article 6(1)(b) of the European Union Merger Regulation unconditionally, or conditionally on BT Group plc giving remedies, which are at BT Group plc’s sole discretion to agree (but in co-ordination and consultation with the Sellers); or (ii) clearance of the Acquisition by the European Commission under Article 8(1) or 8(2) of the European Union Merger Regulation unconditionally, or conditionally on BT Group plc giving remedies, which are to be agreed by BT Group plc acting reasonably and in co-ordination and consultation with the Sellers, provided that BT shall not be required to give any remedy which would have a material adverse effect on BT Group plc or the EE Group, or would not be reasonable from a financial or strategic perspective, and in the event that BT Group plc agrees such remedies, the Sellers shall share the cost of such remedies by way of a reasonable reduction in the purchase price for the Acquisition; (f) no EE material adverse change having occurred; and (g) no BT material adverse change having occurred. If the Acquisition Resolution is approved at the General Meeting and each of the other Conditions is satisfied (or, where capable of being waived, waived) prior to the Long Stop Date (or such later date as the parties may agree), BT Group plc will be contractually obliged to proceed to Completion unless the Share Purchase Agreement is otherwise terminated. BT expects the Acquisition to complete before the end of BT’s 2015/16 financial year (on 31 March 2016).

3. Pre-Completion undertakings 3.1 BT Group plc BT Group plc has agreed that until Completion or earlier termination of the Share Purchase Agreement, it shall: (a) ensure at all times that its shares are admitted to the Official List and to trading on the London Stock Exchange; (b) not undertake any share issuance or create any right to subscribe for any Ordinary Shares or share capital, or issue or create any right to subscribe for any other securities or equity interests convertible into Ordinary Shares or share capital (save in connection with any existing BT Group plc employee share plans); (c) not announce, authorise, declare, make or pay any dividend other than ordinary course dividends payable in cash in accordance with its announced dividend policy; (d) not implement any share buy-back or other return of capital, except in accordance with its existing ordinary course share buy-back programme; (e) not implement any reorganisation or other demerger or spin-off; (f) not take any other action which would affect the number of Ordinary Shares in issue or make any other shareholder distribution of income or capital or similar arrangement (other than the exceptions outlined above); or (g) subject to customary exceptions, not solicit any takeover offer for BT Group plc or any similar transaction which would materially prejudice the likelihood of Completion. As a result of the undertakings described above, BT Group plc will be unable to access the equity capital markets to raise additional capital until Completion or earlier termination of the Share Purchase Agreement.

3.2 EE The Sellers have agreed that until Completion or earlier termination of the Share Purchase Agreement, they shall procure that EE: (a) carries on its business in the ordinary course and exercises such rights as it has to procure that the affairs of MBNL are carried on in the ordinary course; and (b) does not, without the prior consent of BT Group plc (except in relation to certain projects of EE agreed with BT Group plc around the time of entry into the Share Purchase Agreement): (i) make any material acquisitions or disposals of assets or properties; (ii) enter into or alter any material contracts except in the ordinary course of business; (iii) enter into or alter any existing material arrangements with the Sellers’ Groups;

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3. Pre-Completion undertakings continued (iv) incur any new material indebtedness or incur any new material guarantee obligations or, except in the ordinary course, indemnity obligations; (v) agree to any change in the terms of the existing investment strategy or, except in limited circumstances, the funding basis of the EE defined benefit pension scheme; (vi) agree any surrender of, or take any action which could prejudice the use of, the EE Group’s tax losses; (vii) enter into or settle any material litigation or other material dispute; (viii) acquire any wireless spectrum; (ix) make any fundamental changes to the network technologies or principal billing systems of the EE Group; and/or (x) perform a number of further customary actions, including: changing the material general terms of employment of its employees; adopting or materially amending any employee benefit, bonus or profit sharing scheme; materially changing its pension and retirement arrangements for employees; declaring a dividend (except in accordance with EE’s 2015 budget) which would result in the Deutsche Telekom cash consideration resulting from the Aquisition being less than zero; issuing or encumbering shares; or making changes to its accounting policies, constitutional documents or corporate group structure. The Sellers have also agreed to customary standstill provisions prohibiting acquisitions of Ordinary Shares or the making of any takeover offer for BT Group plc prior to Completion, from which point the terms of the Relationship Agreement and Standstill and Lock-up Agreement shall apply.

4. Seller Warranties, Indemnities and Covenants 4.1 Warranties The Share Purchase Agreement contains customary warranties given by the Sellers, including in relation to authorisations, valid obligations, filings and consents for the entry of the Sellers into the Transaction Documents, and including in relation to the EE Group, its share capital, accounts and financial condition, material licences and approvals, compliance with laws, condition and sufficiency of its network and assets, tax, material contracts, related party arrangements, litigation, IP and IT systems, employees and benefit arrangements, pension schemes, real estate and ownership and conduct of the MBNL joint venture arrangement.

4.2 Indemnities The Sellers have also agreed, amongst other things, to indemnify BT Group plc in the event that it suffers loss as a result of certain regulatory fines being levied against BT Group plc or the EE Group, and against losses suffered by BT Group plc or the EE Group as a result of certain other investigations and disputes. The warranties and indemnities given by the Sellers are subject to customary financial and other limitations.

4.3 Covenants The Share Purchase Agreement contains customary covenants restricting the Sellers from competing with EE’s business for a period of three years following Completion (subject to customary exceptions for existing businesses and financial investments) and from soliciting employees of the EE Group for a period of two years following Completion (subject to customary exceptions). The Share Purchase Agreement also contains a customary tax covenant in respect of liability for taxes due pre and post-Completion.

5. Company Warranties and Indemnity The Share Purchase Agreement contains warranties given by BT Group plc as to, amongst other things, its capacity and authority to enter into and perform its obligations under the Transaction Documents, compliance by BT Group plc in all material respects with certain laws and regulations, the availability of financing for the cash element of the consideration for the Acquisition, the accuracy of its public filings, and there having been no material adverse change to its financial position since its last accounts date. BT Group plc also agrees that it will indemnify the Sellers in the event that they suffer loss as a result of BT having taken certain actions in respect of the EE defined benefit pension scheme or the BT defined benefit pension scheme (but in relation to the BT Pension Scheme, only where Deutsche Telekom is identified as being connected to BT Group plc by virtue of the appointment of a Director to the Board by the Deutsche Telekom Group). The warranties and indemnity given by BT Group plc are subject to customary financial and other limitations.

6. Other undertakings Prior to Completion, the Sellers and BT Group plc will agree the scope and terms of any transitional services arrangements required after Completion, with a view to entering into separate transitional services agreements between EE, BT Group plc and each of the Sellers at Completion. The purpose of these transitional services agreements is to document any services that are currently provided by a party (or a member of its group) and that the recipient of those services wishes to continue to receive for a transitional period from Completion. Any services that a service recipient elects to continue to receive from Completion will be provided on the current terms or agreement applicable to the provision and receipt of those services. Unless otherwise agreed, the maximum term of each service will be between six and 18 months depending on the type of service. Each Seller, as applicable, will procure that EE can continue to benefit from an existing Orange or T-Mobile brand licence for three calendar months following Completion. Prior to the date falling three calendar months after Completion, the Sellers (or the relevant members of their groups), BT Group plc, and EE will agree appropriate conditions for the continued use of the Orange or T-Mobile (as applicable) brands by EE following that date until the date falling 36 months (in the case of the T-Mobile brand) and 33 months (in the

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6. Other undertakings continued case of the Orange brand) thereafter. Such agreement will include appropriate modifications to the existing brand licences to reflect the change in ownership of EE, and continued use of the brands will be for the purpose of an orderly wind-down and extraction of the Orange and T-Mobile brands from EE’s business and subject to the continued payment of royalties. BT Group plc has also undertaken to Deutsche Telekom AG to provide, from Completion, a back-to-back guarantee of Deutsche Telekom AG’s guarantee to Hutchison, to a maximum value of £750m. Deutsche Telekom AG’s existing arrangement guarantees EE’s obligations in respect of any liability incurred by EE under the MBNL joint operation.

7. Guarantee Deutsche Telekom AG has agreed to guarantee the performance by Deutsche Telekom, and Orange S.A. has agreed to guarantee the performance by Orange, of their respective obligations under the Share Purchase Agreement.

8. Break fee If the Board changes its recommendation that Shareholders vote in favour of the Acquisition prior to the vote being taken and Shareholders do not approve the Acquisition or if BT Group plc recommends an alternative transaction prior to Completion and the Acquisition does not proceed to Completion as a result, then BT Group plc shall pay a break fee of £250m (in aggregate) to Deutsche Telekom and Orange.

9. Termination In the event that the Conditions are not satisfied or, where capable of being waived, waived by the Long Stop Date (or such later date as the parties may agree), including where any remedies required by the CMA in order to obtain merger clearance are not reasonable, the Share Purchase Agreement will automatically terminate. BT Group plc may terminate the Share Purchase Agreement prior to the Long Stop Date if the Acquisition Resolution is not approved. The Sellers are entitled to terminate the Share Purchase Agreement prior to the Long Stop Date if the Board changes its recommendation that Shareholders vote in favour of the Acquisition prior to the vote being taken and Shareholders do not approve the Acquisition or if BT recommends an alternative transaction prior to Completion and the Acquisition does not proceed to Completion as a result.

10. Costs BT Group plc and the Sellers have each agreed to pay the costs and expenses incurred by them in connection with the preparation, negotiation, entering into and completion of the Transaction Documents and any other agreements in respect of the Acquisition. BT Group plc has agreed to bear any stamp duty or other transfer taxes in respect of the transfer of the shares of EE.

Part B Relationship Agreement 1. Relationship Agreement with Deutsche Telekom AG and Deutsche Telekom At Completion, BT Group plc will enter into the Relationship Agreement with Deutsche Telekom AG and Deutsche Telekom, which will regulate aspects of the ongoing relationship between BT Group plc, Deutsche Telekom AG and the Deutsche Telekom Group. The Relationship Agreement will terminate if (a) the Ordinary Shares are no longer listed on the premium listing segment of the Official List and traded on the London Stock Exchange’s main market for listed securities or (b) the Deutsche Telekom Group ceases to be interested in more than 3% of the issued ordinary share capital of BT Group plc. The Relationship Agreement will contain, among other things, undertakings from Deutsche Telekom AG that for such period as the Deutsche Telekom Group holds 10% or more of the issued share capital of BT Group plc: (i) transactions and arrangements between BT Group plc and the Deutsche Telekom Group will be entered into on an arm’s length basis and on normal commercial terms; (ii) neither it nor any member of the Deutsche Telekom Group will take any action that would have the effect of preventing BT Group plc from complying with its obligations under the Listing Rules; and (iii) neither it nor any member of the Deutsche Telekom Group will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules (the ‘Independence Provisions’). Deutsche Telekom AG undertakes to procure the compliance of its group members with the Independence Provisions.

2. Standstill Provisions The Relationship Agreement will contain standstill provisions pursuant to which Deutsche Telekom AG undertakes on behalf of itself and the Deutsche Telekom Group for a period of three years from the date of the Relationship Agreement (the “Initial Standstill Period”), subject to certain exceptions, not to: (i) acquire or offer to acquire any interest in any shares or other securities of BT Group plc as a result of which the aggregate interest of the Deutsche Telekom Group and any of its concert parties increases above 12% of Ordinary Shares in issue at any time; (ii) act in concert with any person with respect to the holding, voting or disposition of any shares or other securities of BT Group plc; (iii) solicit or participate in any solicitation of Shareholders to vote in a particular manner at any meeting of Shareholders; or (iv) actively or publicly make any proposals for any merger, consolidation or share exchange involving shares or other securities of BT Group plc (for the purposes of this Part B only, the ‘Standstill Provisions’).

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2. Standstill Provisons continued The exceptions to the Standstill Provisions include circumstances: (i) where the Deutsche Telekom Group acquires an interest in any shares or other securities of BT Group plc from the Orange Group provided that such acquisition does not increase the aggregate interest of the Deutsche Telekom Group and its concert parties above 15% of the Ordinary Shares in issue; (ii) where the Deutsche Telekom Group announces an offer under Rule 2.7 of the City Code on Takeovers and Mergers (the “Code”) or takes any action requiring it to make an offer under Rule 9 of the Code, in each case if such offer is recommended by the Directors of BT Group plc; (iii) where any third party makes or announces under Rule 2.7 of the Code an offer to acquire the issued ordinary share capital of BT Group plc, whether such offer is recommended by the Directors of BT Group plc or not; and (iv) where BT Group plc makes any offering or issue of shares or other securities and the Deutsche Telekom Group takes up its rights to subscribe for or acquire the shares or other securities offered to it by BT Group plc. Under the Relationship Agreement, Deutsche Telekom AG undertakes, among other things, that for a period of two years from the expiry of the Initial Standstill Period, in the event that the Deutsche Telekom Group acquires (other than as a result of a reduction or re- organisation of share capital or re-purchase of shares or other securities of BT Group plc) any Shares in excess of 15% of the Ordinary Shares in issue (the ‘Excess Shares’), it shall procure that the votes attaching to such Excess Shares shall be exercised (subject to the provisions of the Code and applicable law or regulation) in accordance with the recommendation of the Board of Directors of BT Group plc on all shareholder resolutions which relate to a transfer of an interest in Ordinary Shares carrying in aggregate 30% or more of the voting rights of BT Group plc and on all special resolutions of BT Group plc. After expiry of the Initial Standstill Period, the Deutsche Telekom Group will otherwise be free to increase its shareholding in BT Group plc.

3. Lock-up Provisions The Relationship Agreement contains lock-up provisions pursuant to which Deutsche Telekom AG and Deutsche Telekom undertake for a period of 18 months from the date of the Relationship Agreement, subject to certain exceptions, that neither they nor any of their group members will, directly or indirectly, offer, sell, contract to sell, grant or sell options over, purchase any option or contract to sell, transfer, charge, pledge, grant any right or warrant or otherwise transfer, lend or dispose of any shares in BT Group plc or any securities convertible into or exercisable or exchangeable for such shares, or announce or otherwise publish an intention to do any of the foregoing (each of the above activities being a ‘Disposal’). The exceptions include: (i) where Deutsche Telekom AG or Deutsche Telekom accepts any offer by a third party for the whole of the ordinary share capital of BT Group plc, whether by tender offer or scheme of arrangement, or provides an irrevocable undertaking or letter of intent to accept or vote in favour of any such offer; (ii) any Disposal to any member of the Deutsche Telekom Group, provided that the transferee agrees to be bound by the restrictions of the Relationship Agreement; and (iii) any sale of shares via any single off-market trade to a Financial Investor of no more than 5% each of the Ordinary Shares in issue of BT Group plc (or, on one occasion only, the sale of two stakes of not more than 5% each at the same time to two different Financial Investors), provided that any transferee enters into a lock-up agreement on substantially similar terms to the lock-up provisions of the Relationship Agreement.

4. DT CP Contract Prior to any Disposal by Deutsche Telekom AG, Deutsche Telekom or any of their group members in accordance with paragraph 3(iii) above, BT Group plc has a right of first offer in relation to the relevant shares (subject to the passing of the Buy-Back Resolution), and such right is set out in the DT CP Contract. Pursuant to the DT CP Contract, prior to an intended Disposal to Financial Investors, the relevant selling entity is obliged to issue a notice to BT Group plc specifying the number of Ordinary Shares proposed to be sold or transferred. BT Group plc has nine Business Days within which to make an offer for all of the Ordinary Shares detailed in the notice, or else its right to make an offer will lapse. If the offer is not accepted, the selling entity may make the sale or transfer within three months of the delivery of the notice to BT Group plc at a price equal to or greater than the price offered by BT Group plc. If BT Group plc does not make an offer within the allotted time, the selling entity may sell the Ordinary Shares within three months of the delivery of the notice to BT Group plc at any price. The DT CP Contract will terminate 18 months from Completion. The notice from the selling entity may be issued to BT Group plc during a close period or prohibited period (as such terms are defined in the Model Code of Chapter 9 of the Listing Rules) of BT Group plc. If any such period does not expire prior to the end of the nine Business Day period within which BT Group plc may elect to make an offer to buy-back the shares, BT Group plc will not be able to exercise its right of first offer. When exercised in conjunction with BT Group plc’s right of first offer in relation to Ordinary Shares held by Orange and Orange SA, the maximum amount of Ordinary Shares BT Group plc can acquire by exercise of its rights of first offer is approximately 14% of BT Group plc’s share capital on an enlarged basis post-Acquisition. The price at which Ordinary Shares can be bought back shall be no more than the higher of the closing price of the Ordinary Shares on (i) the date on which BT Group plc makes an offer to buy-back the Ordinary Shares and (ii) the last trading day before the buy-back takes place. In addition, BT Group plc has separately undertaken to give the Sponsor prior notice of its intention to make an offer for Ordinary Shares under the DT CP Contract, to consult with the Sponsor regarding such offer and not to make such offer unless at the relevant time the Board, having been so advised by the Sponsor, considers such offer to be fair and reasonable as far as Shareholders are concerned. After expiry of the lock-up period described above, the Deutsche Telekom Group will be free to dispose of its shareholding in BT Group plc without further restriction.

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4. DT CP Contract continued A copy of the DT CP Contract will be available for inspection at the Company’s registered office not less than 15 days before the date of the General Meeting.

5. Rights of Deutsche Telekom AG Under the Relationship Agreement, subject to compliance with any applicable regulatory requirements, Deutsche Telekom AG is able to appoint one Non-Executive Director (the ‘Deutsche Telekom Representative Director’) to the Board for so long as the Deutsche Telekom Group holds 10% or more of the issued share capital of BT Group plc (provided that, if the shareholding is reduced below 10% as a result of a non-pre-emptive share issuance by BT Group plc, the board appointment right shall continue for as long as the Deutsche Telekom Group holds at least 8% of BT Group plc’s shares but provided further that such reduced shareholding shall not have occurred as a result of the Deutsche Telekom Group selling Ordinary Shares, and also provided that the Deutsche Telekom Group must top up to 10% within 12 months or the right will lapse). Any such appointment shall be made in consultation with the BT Group plc Nominating & Governance Committee and the appointee must be approved by the BT Group plc Chairman (such approval not to be unreasonably withheld or delayed). The Relationship Agreement provides for the establishment of a new committee of BT Group plc (the ‘Conflicted Matters Committee’) which shall assess whether and to what extent the Board papers and Board meetings of BT Group plc are likely to consider or refer to any matter in respect of which the Conflicted Matters Committee believes that either: (i) BT Group plc and the Deutsche Telekom Group are competitors; or (ii) there is an actual or potential conflict of interest between BT Group plc and the Deutsche Telekom Group (a ‘Conflicted Matter’). The Conflicted Matters Committee shall comprise of at least three members including at all times the Secretary to the BT Group plc Board, the Head of Competition and Regulatory Law and the Director of Governance. The Deutsche Telekom Representative Director shall not be a member of the Conflicted Matters Committee. The Deutsche Telekom Representative Director shall not attend any Board meeting of BT Group plc unless a senior compliance officer of Deutsche Telekom AG has received prior confirmation that the Conflicted Matters Committee has considered whether such attendance raises any concerns in relation to a Conflicted Matter. In the event that the Conflicted Matters Committee has a serious or immediate concern in relation to a Conflicted Matter, the Deutsche Telekom Representative Director shall not attend any BT Group plc Board meetings in relation to the Conflicted Matter and shall not receive any information in relation to the Conflicted Matter. Deutsche Telekom AG is also entitled to receive, subject to compliance by BT Group plc with its legal and regulatory obligations, such financial or other information in relation to the BT group as is necessary or reasonably required by Deutsche Telekom AG in order to comply with its reporting requirements and legal, regulatory or tax obligations.

Part C Standstill and Lock-up Agreement with Orange SA and Orange 1. Standstill and Lock-up Agreement At Completion, BT Group plc will enter into a Standstill and Lock-up Agreement with Orange SA and Orange, which will regulate the ability of the Orange Group to deal in shares and other securities of BT Group plc. The Standstill and Lock-up Agreement will terminate if (a) the Ordinary Shares are no longer listed on the premium listing segment of the Official List and admitted to trading on the London Stock Exchange’s main market for listed securities or (b) the Orange Group ceases to be interested in more than 3% of the issued ordinary share capital of BT Group plc

2. Standstill Provisions The Standstill and Lock-up Agreement will contain standstill provisions pursuant to which Orange SA will undertake on behalf of itself and its group for a period of three years from the date of the Standstill and Lock-up Agreement, subject to certain exceptions, not to: (i) acquire or offer to acquire any interest in any shares or other securities of BT Group plc as a result of which the aggregate interest of the Orange Group and its concert parties increases above 4% of Ordinary Shares in issue at any time; (ii) act in concert with any person in respect of the holding, voting or disposition of any shares or other securities of BT Group plc; (iii) solicit or participate in any solicitation of Shareholders to vote in a particular manner at any meeting of the Shareholders; or (iv) actively or publicly make any proposals for any merger, consolidation or share exchange involving shares or other securities of BT Group plc (for the purposes of this Part C only, the ‘Standstill Provisions’).

The exceptions to the Standstill Provisions include: (i) where the Orange Group announces an offer under Rule 2.7 of the Code or takes any action requiring it to make an offer under Rule 9 of the Code, in each case if such offer is recommended by the Directors of BT Group plc; (ii) where any third party makes or announces under Rule 2.7 of the Code an offer to acquire the issued ordinary share capital of BT Group plc, whether such offer is recommended by the Directors of BT Group plc or not; and (iii) where BT Group plc makes any offering or issue of shares or other securities and the Orange Group takes up its rights to subscribe for or acquire the shares or other securities offered to it by BT Group plc.

After expiry of the standstill period, the Orange Group will otherwise be free to increase its shareholding in BT Group plc.

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3. Lock-up Provisions The Standstill and Lock-up Agreement will contain lock-up provisions pursuant to which Orange SA and Orange undertake for a period of 12 months from the date of the Standstill and Lock-up Agreement, subject to certain exceptions, that neither they nor any of their group members will, directly or indirectly, effect any Disposal (as defined in Part B above). The exceptions include: (i) any Disposal to the Deutsche Telekom Group; (ii) where Orange SA or Orange accepts any offer by a third party for the whole of the ordinary share capital of BT Group plc, whether by tender offer or scheme of arrangement, or provides an irrevocable undertaking or letter of intent to accept or vote in favour of any such offer; (iii) any Disposal to any member of the Orange Group, provided that the transferee agrees to be bound by the restrictions of the Standstill and Lock-up Agreement; (iv) any sale of shares via any single off-market trade to a Financial Investor of up to all the shares of BT Group plc in which the Orange Group has an interest, provided that the transferee enters into a lock-up agreement on substantially similar terms to the lock-up provisions of the Standstill and Lock-up Agreement; and (v) if the Orange Group owns 2% or less of the issued ordinary share capital of BT Group plc, any Disposal which is by way of a swap or other agreement to transfer the economic ownership of the shares.

4. Orange CP Contract Prior to any Disposal by Orange SA, Orange or any of their group members, in accordance with paragraph 3(iv) above, BT Group plc has a right of first offer in relation to the relevant shares (subject to the passing of the Buy-Back Resolution), and such right is set out in the Orange CP Contract. Pursuant to the Orange CP Contract, prior to an intended Disposal to Financial Investors, the relevant selling entity is obliged to issue a notice to BT Group plc specifying the number of Ordinary Shares proposed to be sold or transferred. BT Group plc has nine Business Days within which to make an offer for all of the shares detailed in the notice, or else its right to make an offer will lapse. If the offer is not accepted, the selling entity may make the sale or transfer within three months of the delivery of the notice to BT Group plc at a price equal to or greater than the price offered by BT Group plc. If BT Group plc does not make an offer within the allotted time, the selling entity may sell the Ordinary Shares within three months of the delivery of the notice to BT Group plc at any price. The Orange CP Contract will terminate 12 months from Completion. The notice from the selling entity may be issued to BT Group plc during a close period or prohibited period (as such terms are defined in the Model Code of Chapter 9 of the Listing Rules) of BT Group plc. If any such period does not expire prior to the end of the nine Business Day period within which BT Group plc may elect to make an offer to buy-back the shares, BT Group plc will not be able to exercise its right of first offer. When exercised in conjunction with BT Group plc’s right of first offer in relation to Ordinary Shares held by Deutsche Telekom AG and Deutsche Telekom, the maximum amount of Ordinary Shares BT Group plc can acquire by exercise of its rights of first offer is approximately 14% of BT Group plc’s share capital on an enlarged basis post-Acquisition. The price at which Ordinary Shares can be bought back shall be no more than the higher of the closing price of the Ordinary Shares on (i) the date on which BT Group plc makes an offer to buy-back the Ordinary Shares and (ii) the last trading day before the buy-back takes place. After expiry of the lock-up period described above, the Orange Group will be free to dispose of its shareholding in BT Group plc without further restriction. A copy of the Orange CP Contract will be available for inspection at BT’s registered office not less than 15 days before the date of the General Meeting.

FINANCIAL EFFECTS OF THE ACQUISITION CONSIDERED IN THE SHAREHOLDER CIRCULAR Introduction The BT Group plc Board believes that the proposed acquisition of EE (the ‘Acquisition’) will generate considerable value for shareholders, with significant cost savings as well as revenue synergies. We have reproduced below the information relating to cost savings and revenue synergies that was set out in the shareholder circular. Adjusting for the net present value of operating cost and capex synergies, the Acquisition values EE at a multiple of 6.0x 2014 EBITDA and 9.6x 2014 OpFCF.a The Acquisition is expected to be accretive to FCF per Ordinary Share from the first full year post-Completion.b As a result of EE’s high amortisation and depreciation charge, the Acquisition is expected to be accretive to Adjusted EPS one year later.c The cash return on investment is expected to comfortably exceed BT Group plc’s cost of capital in the third year post-Completion on the basis of estimated synergies and integration costs.

Cost savings The Acquisition is expected to generate significant operating cost savings and additional capex savings. Together these are expected to reach approximately £360m per annum in the fourth full year post-Completion. Integration costs to achieve these savings are expected to be around £600m. The savings are equivalent to a net present value of around £3.5bn before integration costs or around £3.0bn after integration costs. Both BT and EE have a proven track record in delivering transformation with strong financial results. BT brings its tried and tested approach to cost transformation, which uses forensic analysis to redesign processes to remove inefficiency, reduce the cost of failure and improve customer experience. EE has demonstrated its ability to deliver post-transaction synergies ahead of initial expectations following its creation by the merger of the Orange Group’s UK business and the Deutsche Telekom Group’s UK business. BT is confident it can use the combined experience to unlock significant synergies across the Enlarged Group.

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Cost savings continued The operating cost and capex savings are expected to be achieved as follows: • commercial savings with an annual run-rate of approximately £70m from consolidating sales and marketing operations, procurement efficiencies and simplifying digital platforms and the brand portfolio; • IT savings with an annual run-rate of approximately £90m through consolidating IT systems and insourcing activities; • network savings with an annual run-rate of approximately £80m through integrating some network elements and insourcing certain activities; and • operational savings with an annual run-rate of approximately £120m from consolidating head office functions, rationalising property and realising scale economies in customer service operations.

Revenue synergies BT Group plc expects to generate revenue synergies by providing a full range of communications services to the combined customer base. This includes selling BT’s broadband, fixed telephony and pay-TV services to those EE customers who do not currently take a service from BT. BT Group plc also expects to accelerate the sale of converged fixed-mobile services to its existing consumer and business customers and offer new services, using both companies’ product portfolios, skills and networks. BT Group plc expects revenue synergies, over and above the revenue it had expected to be generated from its standalone mobile strategy, to have a net present value of around £1.6bn. The revenue synergies are expected on a recurring basis, reaching a run-rate level in the fourth year post-Completion. a The multiples are calculated based on: an Acquisition price of £12.5bn less the NPV of the operating cost and capex synergies after integration costs of approximately £3.0bn; and EE Adjusted EBITDA for the twelve months to 31 December 2014 of £1,589m and OpFCF for the twelve months to 31 December 2014 of £993m (both adjusted to remove management and brand fees of £146m, restructuring costs of £77m and exceptional expenses of £336m), as reported in EE’s results for the year ended 31 December 2014. b  After operating cost and capex synergies and before integration costs. c  After operating cost and capex synergies and before integration costs, and excluding purchase accounting adjustments relating to the Acquisition. This statement regarding earnings enhancement is not intended to be a profit forecast and should not be interpreted to mean that the earnings per Ordinary Share for the current or future financial periods will necessarily be greater than those for the relevant preceding financial period.

10_802639_Additional Information_p128-142.indd 140 5/19/2015 11:28:44 AM Cross reference to Form 20-F 141

CROSS REFERENCE TO FORM 20-F The information in this document that is referred to in the following table shall be deemed to be filed with the Securities and Exchange Commission for all purposes. None of the websites referred to in this Annual Report 2015, including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form 20-F:

Required Item in Form 20-F Where information can be found in this Annual Report

Item Section Page 1 Identity of directors, senior management and advisors Not applicable 2 Offer statistics and expected timetable Not applicable 3 Key information 3A Selected financial data Omitted due to reduced disclosure format 3B Capitalisation and indebtedness Not applicable 3C Reasons for the offer and use of proceeds Not applicable

4 Information on the company 4A History and development of the company Additional information Background 130 Group performance Group financial performance Capital expenditure 50 4B Business overview Purpose and strategy Our purpose 2 Our goal 3 Our strategya 3 Delivering our strategy Our business model 6 Our networks and physical assets 9 Research and development 10 Brand and reputation 10 Stakeholders and relationships Our suppliers 12 Human rights 13 Our relationship with HM Government 14 Regulation 14 Our lines of business 29 Consolidated financial statements Notes to the consolidated financial statements Segment information 73 Additional information Cautionary statement regarding forward-looking statements 129 Further note on certain activities 132 4C Organisational structure Purpose and strategy Overview 2 Subsidiary undertakings 127 4D Property, plants and equipment Delivering our strategy Our networks and physical assets Properties 9 Consolidated financial statements Notes to the consolidated financial statements Property, plant and equipment 84 5 Operating and financial review and prospects 5A Operating results Our lines of business 29 Group performance 47 Additional information Alternative performance measures 128 Cautionary statement regarding forward-looking statements 129 5B Liquidity and capital resources Group performance 47 Additional information Cautionary statement regarding forward-looking statements 129 Consolidated financial statements Notes to the consolidated financial statements Loans and other borrowings 98 Financial instruments and risk management 101 Financial commitments and contingent liabilities 109 5C Research and development, patents and licences Delivering our strategy Research and development 10 5D Trend information Group performance 47 Additional information Cautionary statement regarding forward-looking statements 129 5E Off-balance sheet arrangements Report of the directors Statutory information Off-balance sheet arrangements 55 5F Tabular disclosure of contractual obligations Group performance Group financial performance Contractual obligations and commitments 52 6 Directors, senior management and employees 6A Directors and senior management Omitted due to reduced disclosure format 6B Compensation Omitted due to reduced disclosure format 6C Board practices Omitted due to reduced disclosure format 6D Employees Delivering our strategy Our people 7 Consolidated financial statements Notes to the consolidated financial statements Employees 77 6E Share ownership Omitted due to reduced disclosure format

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Required Item in Form 20-F Where information can be found in this Annual Report

Item Section Page 7 Major shareholders and related party transactions 7A Major shareholders Omitted due to reduced disclosure format 7B Related party transactions Consolidated financial statements Notes to the consolidated financial statements Related party transactions 108 7C Interests of experts and counsel Not applicable

8 Financial information 8A Consolidated statements and other financial information See Item 18 below Report of the directors Statutory information Legal proceedings 56 Group performance Group financial performance Income statement Dividends 49 Consolidated financial statements Notes to the consolidated financial statements Financial commitments and contingent liabilities 109 Additional information Articles of Association (Articles) Dividends 130 8B Significant changes Report of the directors Statutory information Going concern 56 9 The offer and listing 9A Offer and listing details Not applicable 9B Plan of distribution Not applicable 9C Markets Not applicable 9D Selling shareholders Not applicable 9E Dilution Not applicable 9F Expenses of the issue Not applicable

10 Additional information 10A Share capital Not applicable 10B Memorandum and articles of association Additional information Articles of Association (Articles) 130 10C Material contracts Omitted due to reduced disclosure format 10D Exchange controls Additional information Limitations affecting security holders 132 10E Taxation Not applicable 10F Dividends and paying agents Not applicable 10G Statement by experts Not applicable 10H Documents on display Additional information Documents on display 132 10I Subsidiary information Not applicable 11 Quantitative and qualitative Consolidated financial statements disclosures about market risk Notes to the consolidated financial statements Significant accounting policies Financial instruments 71 Financial instruments and risk management 101 12 Description of securities other than equity securities Not applicable 13 Defaults, dividend arrearages and delinquencies Not applicable 14 Material modifications to the rights of security holders and use of proceeds Not applicable 15 Controls and Procedures Report of the directors Statutory information US Sarbanes-Oxley Act of 2002 56 Disclosure controls and procedures 57 Internal control over financial reporting 57 Report of the independent auditors – Consolidated financial statements United States opinion 60 16A Audit Committee financial expert Omitted due to reduced disclosure format 16B Code of ethics Omitted due to reduced disclosure format 16C Principal accountants fees and services Report of the directors Statutory information Auditors 56 Consolidated financial statements Notes to the consolidated financial statements Audit, audit related and other non-audit services 77 16E Purchases of equity securities by the issuer and affiliated purchasers Not applicable 16F Change in registrant’s certifying accountants Not applicable 16G Corporate governance Omitted due to reduced disclosure format 17 Financial statements Not applicable 18 Financial statements Report of the independent auditors – Consolidated financial statements United States opinion 60 Consolidated financial statements 61 Notes to the consolidated financial statements 66 ­ a Excluding the second sentence in the third paragraph under the sub-heading “Proposed acquisition of EE by BT Group plc” on page 5.

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5 201 the plc meets Telecommunications plc, British Group subsidiaryAs a wholly-owned of BT reports 10-K as applied to of Form Instruction and (b) (I)(1)(a) forth in General set conditions format. disclosure reduced Form 20-F with the filing this 20-F and is therefore on Form Annual &Report 20-F Form

BRITISH TELECOMMUNICATIONS plc 2015 office: 81 Newgate Street, London EC1A London 7AJ Street, 81 Newgate office: 73830 www.bt.com PHME Registered 1800000 in England No. Registered Group BT by Produced RR Donnelley by Typeset Ltd Printers Leycol in England by Printed paper chlorine-free on elemental Printed sustainably managed forests from Sourced British Telecommunications plc British Telecommunications 00B_802639_CoverSpread_9mm.indd All Pages